The Price of Medical Care and Provider Payment PDF

Dooyoung Lim, Ph.D. Assistant Professor, Public Health [email protected] Last Class  Overview of U.S. Health Expenditure  History of U.S. Health Insurance  Theory of Health Insurance  Types of Health Insurance 2 The Price of Medical Ca...

Dooyoung Lim, Ph.D. Assistant Professor, Public Health [email protected] Last Class  Overview of U.S. Health Expenditure  History of U.S. Health Insurance  Theory of Health Insurance  Types of Health Insurance 2 The Price of Medical Care Parties involved in health service Price determination Factors influencing pricing Is healthcare different? 3 Parties Involved in Goods and Service Transaction Good or service SELLER BUYER Fee $$$ 4 Parties Involved in a Health Service Transaction Healthcare service PROVIDER PATIENT THIRD-PARTY PAYERS 5 Third-Party Payers  Defined as “an entity (other than the patient or healthcare provider) that reimburses and manages healthcare expenses.”  Include private insurance plans, governmental payers (Medicare, Medicaid, TRICARE), and even employers (self-insured plans).  The patient has an agreement with the payer to reimburse the provider.  A provider dealing with third-party payers usually has a contract with them in order to receive payment. 6 Price Determination in Economics  The price of a product is determined by the law of supply and demand. Price Supply P* Demand Q* Quantity 7 Factors That Shift the Demand and Supply Curve  A shift in the demand curve  A shift in the supply curve P P S0 S0 S1 E** P** E* E* P* P* P** E** D1 D0 D0 Q* Q** Q Q* Q** Q  Consumer preferences  Input prices  Income of consumers  Number of sellers  Price of other consumer products-substitutes of complements  Technology  Expectations about the future 8 Government-Imposed Price Control in Healthcare  Price ceiling – A maximum price established by law, contract, or agreement that providers are allowed to charge for a healthcare good or service. P S0 Pa Non-monetary costs that E* consumers are likely to pay to get limited goods or P* services due to shortage E** Pc Max Price D1 D0 Qa Q* Qc Q Excess Demand (i.e., Shortage) 9 Monopoly or Oligopoly Power in Healthcare Markets  A monopolist’s main goal is to maximize profits. Monopolies produce at the point where marginal revenue (MR) equals marginal costs (MC) Monopolistic Market Monopolistic Market with Price Ceiling P P (MC = supply curve MC in the short run) MC B B More resources about Pm Pm A Equilibrium in the monopoly competitive market Price Ceiling Pc C https://www.khanacademy.org/ economics-finance-domain/ap- microeconomics/imperfect- D D competition/ap-monopolies- Qm Q Qm Qc Q tutorial/v/economic-profit-for- MR MR a-monopoly 10 Price Elasticity of Health Service Demand  Healthcare demand is fairly inelastic, meaning that patients are insensitive to changes in healthcare prices. Some exceptions include elective care such as plastic surgery, eye glasses, etc. Inelastic Demand Elastic Demand P P P2 P2 P1 P1 D D Q 2 Q1 Q Q2 Q1 Q 11 Is Health Care Different?  Payments are made by third-parties such as the government and private insurers.  Government-imposed price control.  Usually a single or only a few providers provide services.  Large segments of the industry are dominated by non-profit providers.  Demand for medical services is unpredictable and sudden.  The healthcare product is ill-defined, and the outcome of care is uncertain.  Asymmetric information between patients and providers. 12 Type of Provider and Hospital Payment Retrospective payment  Fee-for-service  Cost-plus reimbursement Prospective payment  Per-capita  Diagnosis-related group Incorporating quality in payment 13 Types of Provider and Hospital Payment  Retrospective payment  Prospective payment  The amount paid is determined after the  The payment is made prior to the provision care is completed based on actual costs. of health care based on a predetermined or fixed amount.  A provider treats a patient and submits an itemized bill to the insurance provider describing the services provided. 14 Types of Provider and Hospital Payment (Cont.) Example: Retrospective Prospective Per-Capita Fee-for-Service (Capitation) Providers Diagnosis-Related Groups Cost-Plus Reimbursement (DRG) Hospitals 15 Fee-for-Service  Fee-for-service (FFS) is the most traditional payment model of healthcare.  Views that health service is provided in a set of identifiable and individually distinct units of services.  Insurance companies or government agencies are billed for every test, procedure, and treatment rendered whenever a patient visits providers.  Providers are reimbursed on the basis of the number of services they provide or procedures they conduct.  FFS rewards providers for the volume and quantity of services provided, regardless of the outcome. 16 Fee Schedule  Fee schedule – a list of physician procedures and pre-established maximum payment rates for each type of service 17 UCR and RBRVS  UCR (Usual, Customary, and Reasonable) amount o The amount paid for a medical service in a geographic area based on what providers in the area usually charge for the same or similar medical service. The UCR amount sometimes is used to determine the allowed amount. o Paying the provider’s billed fee up to some percentile of the distribution of fees in a community. o BCBS in 1960s; adopted by Medicare in 1966.  RBRVS (Resource Based Relative Value Scale) o Reflects resource inputs (time, efforts, and expertise) to deliver a service. o Introduced in Medicare Part B (physician service) in 1992. o The Medicare Physician Fee Schedule (MPFS) uses a RBRVS system. 18 Cost-Plus Reimbursement  Based on the total costs incurred in operating the institution.  The payment method for institutional services, such as inpatient stays in hospitals or nursing homes – e.g., Critical Access Hospitals (CAHs) o CAHs are eligible for allowable cost plus 1% reimbursement. o To reduce the financial vulnerability of rural hospitals and improve access to healthcare by keeping essential services in rural communities. 19 Advantages and Disadvantages of Retrospective Payment  Advantages o Providers can provide necessary care, not constrained by costs.  Disadvantages o Little incentive to economize costs o Can lead to over-provision of services (i.e., additional services that may not be essential) o Give providers an incentive to increase the volume of services and to offer inefficient and/or high-cost services 20 Per-Capita Payment (Capitation)  Provider is paid monthly fee per patient  Fixed amount of payment regardless of how often the enrollee see the provider  Usually for physician services  Per-Member-Per-Month (PMPM) payment from the government for Medicare Advantage plans (i.e., Medicare Part C program) 21 Per-Capita Payment (Capitation) Medicare Advantage (MA) Per-Member-Per-Month Calculation 22 Diagnosis-Related Group (DRG)  DRG is a patient classification system that standardizes prospective payment to hospitals.  DRGs categorize patients into one of 500 groups with respect to diagnosis, treatment, and length of hospital stays depending on the following variables: o Principal and secondary diagnoses. o Surgical procedures performed. o Comorbidities and complications. o Patient’s age, sex, discharge status, other information.  Hospital receives a pre-determined fixed rate for each DRG classification. 23 Diagnosis-Related Group (DRG) e.g., CMS Hospital Inpatient Prospective Payment System Final Rates by MS-DRG, 2020 Interventional cardiology, Peripheral interventions, & Rhythm management Source: https://www.bostonscientific.com/content/dam/bostonscientific/Reimbursement/ RhythmManagement/assets/Hospital-Inpatient-Final-Rule-IPPS.pdf 24 Advantages and Disadvantages of Prospective Payment  Advantages o Providers have an incentive to economize on costs. o Hospitals get to keep the difference between the actual costs of service and the payment as profit.  Disadvantages o May not provide necessary care (i.e., under-provision). o Early discharges to other settings (i.e., cost-shifting). o Unbundling – billing bundled procedures separately. o Up-coding – Reporting a higher-level service or procedures or a more complex diagnosis than medical necessity. o Cream-skimming – selecting relatively healthier patients. 25 Summary of Payment Retrospective Prospective Providers Fee-for-Service Per-Capita (Capitation) Hospitals Cost-Plus Reimbursement Diagnosis-Related Groups (DRG) provide necessary care, not constrained Advantage Incentive to economize costs by costs Under-provision Cost-shifting Over-provision Disadvantage Unbundling Inefficient and high-cost services Up-coding Cream-skimming 26 Incorporating Quality in Payment  Concerns about healthcare quality (IOM, 1999) o 44,000 – 98,000 hospital patients die each year due to medical errors. o $17 billion - $29 billion spent each year on patient injuries caused by preventable medical errors.  Pay-for-Performance (P4P) o Payment based on quality of care and/or patient outcomes. o e.g., hospital payments in Medicare:  Hospital in the top 10% receive 2% above regular Medicare payment (relative performance).  2% cut in payment if hospitals do not publicly report their quality scores. 27 Issues in Designing Quality Payment  What is the right amount?  Selecting high-impact performance measures o Still limited to certain clinical areas o Difficulty in developing cost/efficiency measured  Reward base o Relative vs. absolute performance o Individual vs. group incentives 28 Life Expectancy and Health Expenditure, 1970-2014 29 [email protected] 30