Healthcare Finances and Payments Schemes PDF

ECON 215: Health Economics Healthcare Finances and Payments Schemes Marcelo Torres Gonzalez Fall 2024 Department of Economics University of Illinois at Chicago How are doctors paid? Main Schemes Payment Schemes...

ECON 215: Health Economics Healthcare Finances and Payments Schemes Marcelo Torres Gonzalez Fall 2024 Department of Economics University of Illinois at Chicago How are doctors paid? Main Schemes Payment Schemes (1) (2) (3) FFS Capitation Salary Fee-For-Service (FFS) Traditionally, doctors are compensated through a FFS mechanism (majority in US). EX: patient comes to cardiologist for the insertion of a coronary stent. Doctor charges for visit, for insertion of stent, any imaging that was done. FFS reimbursements based on a cost-based (“cost-plus”) system where doctors are paid an additional amount (or % of costs) on top of cost/service in order to account for fixed costs like office space, etc. Known as a retrospective payment system (money delivered after care is received) Physician establishes fees and payer generally paid them (physician is the price maker), or there could be a known fee schedule (physician is the price taker); much like ordering food at a restaurant. Economic incentives under Fee-for- service: MR = MC (still) Marginal Revenue Incentives for physician: When price is fixed (reimbursement is fixed --> MR is fixed), physicians can determine how many of each procedure to engage in by examining their marginal costs (cost of supplies, effort, time, etc.) So long as the physician’s marginal benefit of providing the service is greater than his/her marginal cost, he/she has an incentive to provide it (where have we seen this before?) This can cause some services to be valued over others (surgery over PC). Can encourage medically unnecessary services, overutilization  Variations in Fee-for-service Payer (insurer) has an incentive to limit fees under FFS (until 1992) Usual, customary, and reasonable (UCR) limits to fees (established maximum amount in a geographic region) – Medicare had a version of this until 1992 (CPR – customary, prevailing, and reasonable) Health insurers determine what they deem to be "usual, customary and reasonable" and pay only a percentage of that. Usual charge: physician’s median charge last year for service Customary charge: percentile distribution of fees charged by other doctors in geographic area Reasonable charge: Allowances in certain circumstances  Variations in Fee-for-service: UCR EX: Dr. Park charges an average of $100 for a teeth cleaning (usual fee). Purtle Shield Insurance company knows the distribution of charges in its network ($50 at 10th percentile, $60 at 40th percentile, $82 at 80th percentile,…) and uses the 80th percentile for customary fee. Dr. Park would then be paid $82 (since customary < usual, in this case) By increasing customary fee, physicians are not entirely price takers here. This system is inherently inflationary ---> leads to higher prices over time As cost containment became more of an issue UCR largely given way to payer-determined fee schedules  Variations in Fee-for-service Instead of providers determining fees, payers use bargaining power to negotiate discounted fees from doctors Payers have a large pool of patients that they could (in effect) exclude from providers Discounts in exchange for doctors getting “preferred provider” status Only big providers have this kind of power --- takes sufficient market power (i.e. insurer provides insurance to a “significant” portion of the market) i.e. ESI, Medicare *Note: about 10,000 people age into Medicare each day. Total enrollment ~55,504,005 (in 2015)  Variations in Fee-for-service Fee-schedule: In general, pre-arranged fees for each service performed Can emphasize or deemphasize certain procedures If we feel tonsillectomies are unnecessary, lower the reimbursement If we want colonoscopies to be outpatient reimbursement could be $2000 in outpatient and $1000 in inpatient, for the procedure.  Variations in Fee-for-service: RBRVS Payer attempts to limit fees (continued) 1992: Medicare implements fees based on resource-based relative value scale (RBRVS) Tried to capture: actual cost of work done by physician, costs of operating practices, and cost of liability legalcosts Included adjustment for geography Medicare determines max reimbursement based off of this Because of large patient pool, Medicare has bargaining power to set reimbursement schedule.  Variations in Fee-for-service RBRVS is very complex, with over 7,000 individual procedures assigned different relative value units (RVUs) RUO's comparecosts ofaooaduerekqft.ee RBRVS is adopted by many private insurers and some Medicaid programs *Still a FFS payment system – with a built in fee schedule The relative value of each service is quantifiable and is based on the concept that there are three components of each service: the amount of physician work (52%) that goes into the service, the practice expense (44%) associated with the service, and the professional liability (4%) expense for the provision of the service. The relative value of each service is multiplied by Geographic Practice Cost Indices (GPCIs) for each Medicare locality and then translated into a dollar amount by a conversion factor (dollar amount determined from CMS). RVU o  Variations in Fee-for-service The RBRVS is based on the principle that payments for physician services should vary with the resource costs for providing those services and is intended to improve and stabilize the payment system For example, in 2015, a procedure had a RVU of 1.49 in Buffalo. Adjusted for New York City, it was worth 1.57 RVUs. Using the 2015 Conversion Factor of $37.90, Medicare paid 1.49 * $37.90 ( or $56.47) in Buffalo and 1.57 * $37.90 ( or $59.53) in New York.  Variations in Fee-for-service RBRVS specifies a relative but not absolute cost, so does not really solve fundamental pricing issue Absolute levels of compensation set by arbitrary limits like Medicare budget and growth rate targets (SGR = sustainable growth rate formula) Problems: Bias towards overcompensation for procedures done by specialists, flawed geographic adjustments  CAPITATION Prospective payment RBRVS neglects economies of scale and scope Bigger practices or physicians who do a lot of a certain procedure may be more efficient in certain ways. ______________________________________________________________________ Prospective payment systems - Give payments to doctor before treatment Payments not directly tied to cost of service Payment per episode: payment for each episode of illness Ex: single payment for appendicitis has to cover surgery and any post-surgical visit or complications Accounts for the fact that some illnesses are more complicated to resolve than others Gives doctors incentive to resolve illness early to avoid subsequent visits Hospital Medical DRG system (payment for diagnostic group) analogous  Prospective payment Also known as bundled reimbursement, where multiple services associated with the case are bundled into one payment. Bundling typically used to refer to lump sum payment for services provided by different providers for single episode, or combined inpatient and outpatient services. Ex: bundled payment for obstetric care for pregnancy episode Any additional care leads to less profit for doctor  Prospective payment Any additional care leads to less profit for doctor Leads to underutilization or underuse or underprovision of care (less care than beneficial), also known as stinting Potentially leads to doctors refusing care to chronically ill, sickest patients, complex cases Leads to poor care for outlier cases (Physicians don’t want to completely shirk care ---> lose business)  Prospective payment Continued PITS Head In the payment limit, implicit capitation payment mechanism Capitation: fixed payment per individual covered (per member per month – PMPM, or per year)  Prospective payment Covers most frequent services given to an individual within a certain time frame Services that are not included in capitated payments are called carve-outs ex: mental health, pharmacy, dental, vision (services that can lead to high expenditures) Generates the same (dis-)incentives described for bundled systems Incentives for doctors to treat early and treat effectively as possible to prevent follow-up visits Underuse, dumping or exclusion of sickest or chronically ill patients  Other forms of physician compensation FFS (retrospective) and prospective payments refer to compensation for payments to physicians who are in own (single-person or multi-person practice) In integrated health care system (delivery and financing in one organization) like HMOs, physicians are often employees of system. In this case, doctors are compensated through salary Salary independent of number of patients, complexity of cases, number of procedures Could create incentive for underprovision and shirking (especially if patient takes a lot of time) May create incentive for overutilization if doctor can refer to another provider or doesn’t face cost of treatment  Other forms of physician compensation To stifle overutilization incentive, integrated health systems may have bonus or incentive (profit-sharing) programs Doctors get salary, plus bonus dependent on own productivity or low-cost behavior ,or profit of unit. Ex: Bonuses can be tied to average number of patient seen daily, % of generic prescriptions, profit/revenues of radiology services unit.  Empirical studies of physician compensation Economic theory predicts relatively higher service utilization with FFS/retrospective system and lower utilization with prospective systems Can be difficult to distinguish over-utilization, under-utilization, and “right” level of utilization Over-utilization may reflect higher quality of care, under-utilization lower quality Summary: Many, many studies show that FFS/retrospective schemes result in more utilization (but also higher quality) than prospective schemes (see McClellan 2011,Journal of Economic Perspectives, for a good review)  Empirical studies of physician compensation Note: we cannot simply compare two sets of doctors (because of unobserved confounders in physicians or patient population) Credible studies rely on quasi-experiments or natural experiments that look at external policy changes across different states of doctors to FFS vs. Trial Randomized Control Ex: RCT No salary, patients randomized (Hickson, Altmeier, and Perrin 1987) FFS doctors scheduled more visits and saw patients more often (difference mostly in well-care visits) More FFS doctors exceeded recommended number of American Academy of Pediatrics recommended well-care visits for children ("too much care" with FFS) More salaried doctors missed recommended number of American Academy of Pediatrics recommended well-care visits for children ("too little care" with salary)  Exercise Focus on FFS and Capitation (Example) Doctor sees patient who has symptoms of condition A. Doctor has choice of two lab tests to confirm diagnosis of condition A. Lab test 1, which costs $100, distinguishes between condition A and condition B. Lab test 2, which costs $250, distinguishes between condition A, condition B, and the much rarer condition C.  Exercise Under FFS, doctor reimbursed cost of labs + 10%, i.e. $110 for test 1 and $275 for test 2. Under capitation, doctor is paid a set dollar amount (e.g. $150) per patient, regardless of which lab test the doctor chooses to order.  Exercise Doctor sees a patient who presents with symptoms. Based on the symptoms the doctor believes that there is a 70% chance of condition A, a 29.999% chance of condition B, and a 0.001% chance of condition C. Peter EEitation Who do you think will order test 1? test 2? What will the profits be? *Also assume that the base office visit costs $50.  Profits Revenue Costs Exercise FFS Scenario testcost 0 If the doctor orders test 1 Éire Reimbursement over thecost ios so s If they order test 2 501.10 2500.1 50 250 330 300 30 Doctor on the FFS scheme will order test 2  Exercise Capitation Scenario Test 1 150m 0 Revene 11pm test 2 H 150 50 2500 150 Thedoctorwillorder test 1  Exercise Recap of exercise: fee-for-service (FFS) led to more expensive (but more precise) test, capitation led to less expensive test - but why?  Exercise Expensive test adds to FFS doctor’s per-patient profit but subtracts from capitation doctors’ per-patient profit Expensive test adds to FFS doctor’s profit because cost of test is always covered and she gets bonus on top expensive test Expensive test subtracts from capitation doctor’s profit because she gets less when she does more or orders expensive services FFS doctors do more of expensive test, capitated doctors do more of cheaper test Does this bear out empirically? Resoundingly, Yes. Ex: MACRA – Shifting Medicare provider incentives Medicare Access and CHIP Reauthorization Act of 2015 Paphyitide Megt BasedPayment System EX: MACRA Medicare Access and CHIP Reauthorization Act of 2015