1 Managed Care

2 Why? We’ve talked about insurance and technology … and costs. Managed care analysis combines some of this. It is tempting to suppose that insurance necessarily leads to higher costs and perhaps to waste. Many feel that various forms of “managed care” may address some of these problems. Networks of providers, including Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Individual Practice Organizations (IPAs), are means to restore competition to the health care sector, and to control expanding health care costs.

3 Fee for Service Remuneration Under FFS, provider both provides health care and advises the consumer on how much is needed. At first glance, it would appear that the consumer’s imperfect information about medicine, when combined with FFS remuneration, would provide the incentives for substantial overconsumption. This is certainly an information problem. Organizational form of HMOs would seem to eliminate over- consumption incentives and replace them with cost-control incentives, and possibly incentives toward underconsumption.

4 Managed Care It is instructive to provide a general description of managed care, leading to a more specific discussion of HMO, while recognizing that the concept of managed care is undergoing constant changes. Most generally, analysts speak of an organized delivery system as a network of organizations (for example, hospitals, physicians, clinics, hospices) that provides or arranges to provide a coordinated continuum (from well-care to emergency surgery) of services, to a defined population. This system is willing to be held clinically and fiscally accountable for the outcomes and the health status of the population served. It is tied together by its clinical (it must treat them) and fiscal (it must finance the treatment) accountability for the defined population. Most often the organized delivery system is and is defined by its association with an insurance product.

5 How to talk about MC Economists have found it difficult to formulate a comprehensive managed care model. An affinity group (in the U.S., often defined by employer) negotiates the opportunity to purchase a managed “food and clothing (F&C)” insurance plan, rather than some alternative “fee-for-F&C” arrangement. In return for a fixed monthly payment, members must shop at a particular store or shopping center with which plan managers have negotiated lower prices for food and clothing. In this arrangement, the plan managers, along with the food and clothing providers, could limit the varieties of goods, and, possibly, total F&C expenditures.

6 How to talk (2) This “managed F&C” arrangement raises a large number of questions as to whether its customers: Get the same quality of goods as under other arrangements. Do not get the goods that they “should” be getting. Actually reduce their total F&C expenditures. Are less well-fed, less healthy, less well- dressed or altogether less satisfied than before.

7 How to talk (3) At the market level, they ask whether: Aggregate F&C expenditures decrease, or their rate of growth decreases. Managed F&C plans meet consumer preferences. Managed F&C providers earn revenues to cover the costs of the goods they sell. Competition from the managed F&C plans impacts the prices that other providers charge?

8 Defined populations(s) and benefit plans System/network integrator or organizer Hospital/health system Physician group Insurance Company Insurance Role Alternative payment mechanisms full capitation capitation mixed with FFS

9 Defined populations(s) and benefit plans System/network integrator or organizer Hospital/health system Physician group Insurance Company Insurance Role Alternative payment mechanisms full capitation capitation mixed with FFS Information Systems Primary care providers Specialists Amb. care centers Home health Hospice Nursing homes Subacute units Hospitals

10 Managed Care One key feature of managed care as the provision of care to a defined number of enrollees at a capitated, or fixed, rate per member per month. As a result, cost centers such as hospitals, physician groups, clinics, and nursing homes, must be managed under a fixed budget. Under traditional fee- for-service, since cost centers generate revenue, more volume means more profit. Under managed care, more volume means less profit.

11 MC creates incentives for keeping people well by emphasizing prevention and health promotion practices, and when people become sick, by treating them at the most cost-effective (least cost per unit care) location in the continuum of care. Clearly, there are also incentives to underuse services, and this may be harmful to patients. Through a more centralized management of services, the goal is to provide additional quality-enhancing features for a given price, or to provide a given set of quality attributes or outcomes for a lower price. The primary provider has a paramount role as the “gatekeeper” to further, and more expensive, services. Managed Care

12 Organizational Structures Gatekeeper Provider Network NoYes No Yes Fee for Service (FFS) Health Maintenance Organization (HMO) Point of Service (POS) Preferred Provider Organization (PPO)

13 Managed Care Plans

14 Some key aspects An economic analysis of this model, shows the importance of integrating the information among the various services. In Figure 12.1, information systems are the hub of the wheel; Shortell and his colleagues note that the “embryonic” development of most clinical information systems is a fundamental barrier to the success of managed care systems. Large health centers are budgeting $100 million or more apiece over the next several years to integrate systems that were often developed separately, and almost never “talk to each other.”

15 Price Discrimination Under FFS, there could be price discrimination. How? High Valuation Low Valuation QHQH QLQL $ $ P* PHPH HH Charge a lot to those who can afford it. Charge less to those who can’t. MC=AC LL Q* H Q* L PLPL

16 Price discrimination is hard in HMOs Providers find it difficult to determine how much individual consumers value their services. Prepayment-based organization can shop among providers, thus limiting providers’ monopoly power. Can cut providers OUT of the organization if prices are too high. $ Quantity DFDF F = FFS PFPF Total Exp. FFS DMDM M = MC PMPM QFQF Total Exp. MC QMQM

17 Some key aspects Studied de-emphasis of the acute care hospital model. Hospitals provide expensive care, and moving toward cost-effective models necessarily moves away from hospital care. Often, primary care physicians are the gatekeepers of managed care systems, directing patients to appropriate (i.e. cost-effective) treatment settings. If they are induced to “feed” patients into the hospital, instead, this will lead to increased costs. MC seeks a vertical integration of what had previously been a generally unintegrated system of health care treatment. Such integration, through coordination of care and improved information, has the potential to address the health care costs in a manner that would appear to address criteria of economic efficiency. Yet, the integration is costly, and the quality of the resulting care may not match all consumer preferences.

18 Managed Care and Spending Growth There is a strong consensus that managed care reduces utilization, especially of hospital care. A different, but related question is whether managed care organizations 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. It is important to provide a framework for discussing the relationship among FFS, managed care organizations (MCO) and total costs. Suppose that we are concerned about costs per person for treating a particular illness over 3 periods. Let us assume that people use either FFS or MCO, and that the population is fixed. We can calculate the total treatment costs as:

19 Total Treatment Costs = (Number in FFS) * (FFS Costs/Person) + (Number in MCO) * (MCO Costs/Person) Dividing both sides by the population we get: Treatment Costs/Person = (Fraction in FFS) * (FFS Costs/Person) + (Fraction in MCO) * (MCO Costs/Person) Suppose, in Period 1, that FFS treatment costs $200, MCO treatment costs $100, that 60% use FFS and that 40% use MCO care. The treatment costs per person will be: Treatment Costs/Person = (0.6) * (0.4) * 100 = = 160. Let’s put together a table. Managed Care and Spending Growth

20 Managed Care and Cost Containment

21 Managed Care and Cost Containment

22 What does this tell us? If MC costs are increasing as fast as FFS, then rate of growth is impacted ONLY when people switch to managed care settings or practices. EXAMPLE. “Drive-Through” Deliveries. We’ve cut hospital stays from 3 days to 1 day. At a cost of $1000 per day multiplied by about 4 million normal births per year, we would save: –$1000/day * 2 days/birth * 4 million births = $8 billion PER YEAR. But we’ve DONE it already. Other costs may continue to grow.