Health Economics Unit 2

Contrast Traditional staff model HMO and PPO

1) Physician payment is on a fee-for-service basis in a PPO, whereas it is more likely on a salaried basis in an HMO (and the HMO itself would likely be paid on a capitated basis) 2) An HMO brings closely together an insurance plan, doctors, and facilities, while a PPO provides insurance and contracts out for medical care provision with a network of independent providers 3) Doctors in an HMO only see patients enrolled with that HMO, while doctors in a PPO network can see other patients outside of that network. 4) HMOs provide no out-of-network coverage, while PPOs often do (at a higher coinsurance rate than in-network coverage).

Contrast IPA HMO and PPO

1) Physician payment is typically on a capitation basis in an IPA HMO, meaning physicians are paid a set amount for each patient regardless of treatment intensity. In contrast, in a PPO plan payment is typically on a fee- for-service basis, although the fees are generally negotiated downward relative to those faced by uninsured patients or those with indemnity plans. 2) Patients typically get no out-of-network coverage in an IPA HMO, whereas they get some out-of-network coverage with a PPO, albeit less than they get in network.

Discuss two distinct reasons why the tax subsidy for employer-provided health insurance likely increases premiums.

1) The tax subsidy lowers the effective price of insurance, which should increase the demand for insurance, thereby increasing its price (premiums). 2) The tax subsidy lowers the effective price of insurance, which should increase the demand for insurance, which increases the number of people who have insurance, which increases the demand for medical care, which increases medical expenditures, which increases premiums.

PPO plans:

Insurance provided by a preferred provider organization that contracts special reduced rates with a group of independent providers and lowers the cost to patients of seeing providers in this group. Providers are still paid fee-for-service rather than per-patient so there is some incentive to over-provide, but costs will be lower than traditional FFS plans because of the rate reductions.

IPA HMO plans:

Insurance provided by an MCO that contracts with an association of independent physicians to treat patients on a capitated basis. Capitation means there is no incentive for member physicians to over- provide services, but these physicians may see other patients on a FFS basis and be incentivized to over-provide services to them.

Holdbacks:

MCOs may hold back a portion of payment to physicians until the end of the year and only grant it if physicians meet cost control targets, incentivizing physicians to control their costs to receive the extra money. Bonuses can be administered in a similar way to incentivize cost control. Because holdbacks are typically administered at an aggregate level for a group of physicians, there is a free-rider/prisoner's dilemma problem in which physicians are incentivized to not control their costs, no matter what their colleagues do. Especially in looser networks of physicians, this is not likely to incentivize cost control.

Second opinion program:

MCOs may pay for or even require a second opinion before agreeing to pay for expensive surgeries or treatments Consumers and doctors generally don't like this kind of provision because it wastes time, but it is also possible that it increases costs if the smaller, more numerous costs of paying for many second opinions outweigh the gains from preventing payment for fewer expensive, but potentially wasteful operations.

Gatekeeper provision:

MCOs may require consumers to see a primary care provider before being referred to specialists for further treatment. This could control costs by making sure that patients who can be treated by cheaper PCPs are treated there for less than if those same patients were treated in the same way by a more expensive specialist first. This raises a similar potential problem as second opinion programs: It is possible that the net effect on costs is positive (avoiding enough expensive specialist visits to make up for the added costs of more primary care visits) or negative (not avoiding enough specialist visits to make up for the costs).

Bargaining over prices/fees:

MCOs with a large number of patients can negotiate down fees that they reimburse to providers in order to lower their outlays on reimbursements and control costs. Providers agree to these arrangements in order to increase the number of potential patients that they might see through the MCO. Although this reduces the cost per consumer, it is possible that the quantity of visits may increase as medical care becomes more convenient for the insured (leaving the net effect on costs ambiguous) or that the quality of services may fall since doctors have less incentive to provide high quality services to attract new patients.

Which subgroups of the population does Medicaid primarily cover? Which of these groups of people are covered most generously?

Medicaid broadly covers low-income children, parents, pregnant women, and sometimes childless, non-disabled adults (as well as some other groups of people). Medicaid is generally offered more generously to children and pregnant women.

Explain why Medicaid patients have more trouble obtaining access to health care providers than patients with private insurance.

Medicaid pays providers very poorly relative to private insurance (and even worse than Medicare). Private health care providers therefore generally refuse to accept Medicaid if they can fill up their days with patients insured by private plans or Medicare. This often leaves Medicaid patients stuck with a small number of relatively low-quality options.

Part A

Part A refers to coverage for hospitalization. This coverage is free and mandatory. Hospitalization was offered initially on a FFS basis, leading to an incentive to providers to overtreat hospitalized patients with a higher quantity of less-necessary treatments instead of less, cheaper care. Additionally, hospitalized Medicare patients initially faced a benefits structure that was misaligned with incentives to avoid unnecessary hospital time: short to somewhat long stays were covered generously while very long stays were not covered at all.

Part B

Part B refers to physician/outpatient coverage. This coverage is optional, but those who opt in must pay a relatively low monthly premium as well as a low annual deductible before a generous 20% coinsurance rate applies. One problem with this plan is that the deductible is very low, incentivizing wasteful flat-of-the-curve care once it is reached. Further, the deductible grew less than the rate of inflation on average since Medicare's inception, meaning that it has become lower than initially intended in real terms.

Part C

Part C refers to Medicare Advantage plans, which are federally subsidized plans that allow seniors to get their Medicare Part A and B coverage through a private insurer. These plans have varying costs, but they cost seniors less than their true value due to the subsidies and risk adjustments the insurers receive. One problem with these plans is that the subsidies they have received over time have grown relative to the cost of insuring seniors through core Medicare, meaning that they have been subsidized "too much" and may lead to a socially suboptimal high quantity of seniors with these plans.

Part D

Part D refers to optional coverage for prescription drugs, which are not covered under Part A or B. Those seniors who opt in to Part D must pay a low monthly premium. Additionally, they must meet a deductible higher than that for Part B before having 75% of their drug expenses covered. However, seniors did not have expenses over about $3000 covered at all until catastrophic coverage kicked in at about $4700 with a coinsurance rate of about 5%. This intermediate lack of coverage is referred to as the "donut hole" and essentially reduces the degree of risk protection Part D provides to seniors who need to spend a lot on prescription drugs.

Physician payment on a salaried or capitated basis (as opposed to a FFS basis):

Physicians that are paid on a salaried (capitated) basis are incentivized to perform as few procedures as possible while still keeping their patients (perform as few procedures as possible while still keeping their job) as opposed to performing as many procedures as possible, which would be socially wasteful. However, it is possible that this incentive may go too far and encourage under-treatment as opposed to over-treatment, leading to worse health outcomes and a socially inefficient level of care below the optimum (i.e. treating patients more would lead to a net gain in social welfare).

Prior authorization/denial of payment:

Prior authorization (denial of payment) refers to the decision of an MCO to refuse to pay for a service before (after) it is administered, often because it is experimental and unproven to result in benefits enough of the time to be statistically worthwhile or because other more cost-effective treatments are covered. It is possible that these mechanisms can reduce MCO spending and discourage patient/provider spending on expensive, potentially low-benefit medical care, but it is also possible that they cut the wrong services that actually are beneficial to patients AND socially beneficial. They are also very unpopular with patients

Copayments:

Small copayments reduce the most socially wasteful care - that care that is only worth a small amount to patients and is eliminated when a small copayment is charged Coinsurance rates can also be used to incentivize cost control since patients who are subject to these rates will exhibit some price sensitivity and shop around for a lower price (less price sensitivity than if paying for all care, more price sensitivity than if paying a fixed-dollar consumer copay). Managed care organizations will often use fixed-dollar copays since they have already done a lot of bargaining and searching for low prices, so there is little reason to incentivize consumers to search for low prices in-network.

What do states do to combat poor access to providers for Medicaid patients?

States often give providers (most often hospitals) with a relatively large proportion of patients with Medicaid "disproportionate share payments" in order to offset the losses they face from treating Medicaid patients.

Give an argument for why preventive services (e.g. flu shots, colonoscopies) SHOULD be covered by health insurance plans

The argument for why they SHOULD be covered is that utilizing preventive services could prevent much bigger medical expenditures (e.g. cancer) down the road. In other words, it may be profitable for insurance companies to pay a small bill now rather than a big bill later.

Give an argument for why preventive services (e.g. flu shots, colonoscopies) should NOT be covered by health insurance plans

The argument for why they should NOT be covered is that their utilization is predictable (e.g. annual in the case of flu shots, regardless of whether or not you are sick), so they do not fit the standard model of needing insurance to protect against uncertainty about utilization.

Traditional staff model HMO plans:

insurance provided by a health maintenance organization, which is a managed care organization (MCO) in which the insurance plan, doctors, and facilities are either all the same organization or are closely affiliated Typically paid on a fixed/capitated basis for each patient, so any medical care usage increases costs and cuts down on an HMO's profits.

Why might the tax subsidy for employer-provided health insurance NOT increase the number of employers who offer insurance as a benefit?

there are good reasons for employers to offer insurance aside from the tax subsidy: group coverage takes advantage of economies of scale in the insurance market, and also eliminates the adverse selection problem. For both of these reasons, group insurance is much cheaper than individual insurance, so most employees would value insurance over wages on the margin even without the tax subsidy, meaning employers might still offer it.

Contrast Traditional staff model HMO and IPA HMO:

In a staff model HMO, the insurance plan, doctors, and hospital are either all the same organization or closely affiliated. In contrast, an independent practice association (IPA) is an association of independent physicians that contract with insurance companies to treat patients at an agreed upon rate; the physicians are not employees of the same organization that is providing the insurance coverage.

POS plans:

A point of service plan is a hybrid of IPA and PPO plans in that the independent providers in the insurer's network are typically paid on capitation (IPA), while the plan may also cover services provided out-of-network on a FFS basis at a high copayment rate (PPO). Consumers are incentivized to use providers in-network who have no incentive to over-treat due to being paid on a capitated basis and disincentivized from using providers out-of-network who would be more likely to over-treat them, since they are paid on a FFS basis.

Explain why insurance companies, whose owners are presumably risk averse, are nonetheless willing to take on other people's risks of medical spending.

Insurance companies are able to pool the risks of many thousands of people, and by doing so they take advantage of the law of large numbers and can predict medical expenditures for the whole group very well, even if their predictions might be way off for any one person.

Explain the concept of "crowding out" generally.

Crowding out refers to the fact that government involvement in an otherwise private market can affect the demand or supply of goods in that market (relative to the situation where the government was not involved in that market).

Why could this be a concern?

This is a problem because the intention behind Medicaid and CHIP is to provide health insurance to those who cannot afford or are otherwise unable to obtain insurance on their own. If people were able to obtain private insurance and then switch to free public insurance, this means resources directed to these programs are not being used as effectively as they could by providing insurance only to those who were previously not insured.

CDHP plans:

A consumer-directed health plan is an insurance plan with a very high deductible and in which consumers pay for health care costs beyond the deductible out of a tax-free "health savings account" that they can put money into. Consumers are incentivized to not use small amounts of socially wasteful care because they must pay for a large portion of their care out of a tax-free health savings account (though the effective coinsurance rate is somewhat lower than 100% since they do not pay taxes on earnings put into the HSA) until they meet their fairly high deductible.

Describe the Medicare Prospective Payment System. What incentive problem was it designed to correct? What other incentive problem did it create?

Before the Medicare Prospective Payment System (PPS), reimbursement was done on a fee-for-service basis, with the same incentive to overtreat described in the answer to question 1. The PPS paid hospitals on a per-case rather than per-service basis. Each admission was classified into one of ~500 "diagnosis-related groups" (DRGs) that comes with a fixed payment regardless of how many services are used. This removes the incentive to overtreat patients, but creates a new problematic incentive: "upcoding". This is where the hospitals assign patients to a more profitable DRG code than they should be in, either by exploiting gray areas or simply lying.

Explain how Medicaid and CHIP can crowd out demand for private health insurance.

The health insurance market in the United States used to be made up entirely of private insurers before the introduction of Medicare and Medicaid. Medicare (and Medicare Advantage) have greatly reduced seniors' demand for private insurance. When free insurance is made available to lower-income people and children through Medicaid and CHIP through their original introductions or later expansions, some of the people who take advantage of that free public insurance will have formerly had insurance through a private insurer. It may be the case that they were able and willing to purchase non-group insurance for themselves but chose free public insurance instead when it became available, or it may be the case that employers of low-income people stop offering insurance because their employees can mostly get free coverage through Medicaid or CHIP.

Explain the incentive problems associated with fee-for-service insurance reimbursement. How does switching to capitation reimbursement solve this problem? Explain how capitation could lead to a different incentive problem?

The incentive problem is that fee-for-service reimbursement means doctors are paid for each service, so the more services they perform the more they get paid, meaning they have the incentive to overtreat patients, leading to higher medical expenditures. Capitation reimbursement means doctors get paid a certain fixed amount for each patient on their roster, meaning they get the same amount regardless of how much they treat these patients. This obviously solves the problem of incentive to overtreat, but might go too far in the other direction: since payment is not tied to services, what incentive does a doctor have to provide even medically appropriate services? The doctor's financial incentive under capitation is to provide the minimum amount of care necessary to keep the patient from switching doctors.

Why might the tax subsidy for employer-provided health insurance increase the number of employers who offer insurance as a benefit?

The tax subsidy makes, on the margin, getting paid in health insurance more appealing to employees than getting paid in wages, so one might expect the subsidy to make more employers offer insurance.