Managed Care and Price Competition

Managed Care

Any number of contractual arrangements that integrate financial and delivery of medical care

Fee for Service

The traditional payment method for medical care in which a provider bills for each service provided

What’s the problem with the fee for service model?

Can lead to provider induced demand and overconsumption of medical care

Health Management HMO (Managed Care Model)

A type of managed care organization that functions like an insurer and also arranges for the provision of care

Example of managed care HMO

Kaiser in California

Prepaid Group Practice

An arrangement through which a group contracts with a number of providers who agree to provide medical services to members of the group for a fixed payment

When was the health system infrastructure developed?

1940-1960

Access expanded, quality and distribution of resources improved

1960-1970

Attempts to control health care expenditures through regulatory programs

1970-1980

Market-based approaches adopted

1980-today

California’s Selective Contracting Law Induced Price Competition

Law in California that allowed health insurance plans to exclude some providers from their approved networks - induced price competition

After the California state law:

Hospital costs grew much faster than inflation and hospitals in more competitive areas had higher costs

PPO

Healthcare organization that’s an intermediary between the purchaser of medical care and the provider; establishes a network of providers who agree to pay a specific group of enrollees at discounted rates

How do providers increase their power over a market?

Through consolidation or differentiation (must have status)

How does market power harm consumers?

Raises prices, lowers quality of services, stifles competition

Retrospective Payment System

The reimbursement amount is based on what the provider charged or said it cost to provide the service after the service has been provided

Retrospective Payment

Reimbursement amount is established in advance, before the service is provided

Why is the prospective payment plan better than the retrospective payment plan?

It incentives cost efficiency by providing payment in advance, and encourages providers to manage costs more efficiently

Managed Care Provider Side Control of Moral Hazard

Selective contracting, utilization reviews, and risk sharing arrangements

What law was created in California in 1982?

A selective contracting law that allowed selective contracting with all licensed providers and could use price to select which providers to include

Managed care cost control on Patient side

Benefit design

Benefit design

Set of of rules that determine how consumers can access covered services under a health insurance plan; establish which services are covered, the providers that offer these services, and the cost sharing amounts for the consumer

Moral Hazard on Providers Side

Provider induced demand, shifts in demand to increase quantity

Copayment

Fixed payment per unit of care; used to discourage unnecessary visits

Coinsurance

Percentage of medical costs covered by insurance plan; discourages utilization and encourages price shopping

Deductible

Insurance only starts paying after the patient has spent the deductible amount; exposes patient to full cost of care up to a limit

Out of pocket maximum

Protects patient from catastrophic losses that are incurred by high medical epsenses, forces health insurance to help

RAND Health Insurance Experiment

An experiment led by health economist Newhouse where they had two groups of families with two plans, free and high deductible. The free plan families consumed more healthcare on average, while the other consumed less healthcare. While there were little differences in resulting health, those who had health conditions before hand suffered under the high deductible plan

What happens if you can’t afford the copayment?

Print and Layton discovered that individuals will cut down on healthcare because they won’t or can’t pay the deducible

Value Based Insurance Design

Notion that copayments should change based on the value of underlying medical care