Unformatted text preview: Physician agency, induced Physician agency, induced demand and malpractice
Class 31 Health Economics Loyola University Chicago April 11, 2011 Lecture Outline Lecture Outline
Physician labor supply Induced demand RBRVS payments Malpractice Physician Income Incentives Physicians often face a unique situation with regard to the incentive to work extra hours. Normally, the higher a person’s pay is per hour, the more willing the person is to work more hours. For many physicians, however, the more lucrative each hour of practice is and the more hours the physician puts in, the more each hour of foregone leisure is worth. In this case, the supply curve is “backward bending,” meaning that with additional pay, the physician will choose to work fewer hours. Physicians’ Labor Supply Curve If the income effect dominates, a rise in the wage rate can actually cause the individual labor supply curve to slope downward!!! Patients’ Decision on Which Patients’ Decision on Which Physician to Choose Search for doctors is costly Not searching provides monopoly power to physicians Incentive to price discriminate relative to those who research and do extensive search How to discriminate? Not easy. Might lose those who search. Advertise to provide information to consumers Separate Demand Curves No resale, easy to identify and elasticities differ Private FFS insurance, no insurance, public insurance, etc. Maximize profit by setting MR in each market equal to MC. Price higher in market with less elastic demand. Profit higher than if do not discriminate Discouraged by AMA & states Most likely for noncovered procedures Model of Monopolistic Competition
Monopolistic competition is a market structure in which: there are many competing producers (physician practices/groups) in an industry, each producer sells a differentiated product (quality, location, etc.), and there is free entry into and exit from the industry in the long run (conditional on being licensed MD this seems reasonable) Product Differentiation
There are three important forms of product differentiation: Differentiation by style or type – General practice vs. specialists, board certification Differentiation by location – Urban vs. suburban vs. rural, highincome vs. lowincome areas Differentiation by quality – Ordinary ($) vs. expert in field ($$$) PhysicianPatient Interactions PhysicianPatient Interactions Classic case of principal (patient) / agent (physician) problems Asymmetric information (Arrow) Patient accedes authority to physician Assumes agent acts in principal’s interest How has asymmetry changed over time? Imperfect agency: Agent provides inappropriate treatment for selfinterest Patient knowledge vs. provider sophistication Supplierinduced demand (revenues) Malpractice (effort) Model of Induced Demand Model of Induced Demand Definition: Demand beyond amount that would be chosen by patient if patient fully informed. Question is why not charge more or recommend more care if feasible Implication: physician not acting as a perfect agent. Could possibly be helpful or harmful to patient. Physician provides imperfect information to generate inappropriate level of demand. Financial incentive usually involved. Physician as utility maximizing agent Dranove and Wehner (1994) find model used to show supplierinduced demand leads to a prediction that more Ob/GYN doctors lead to more births! U = U(I, L, D) where I = net income, L = leisure hours and D = discretion used to influence demand. D is negatively related to U. Augment demand only until MU of additional income from D = marginal disutility of added work plus use of D. Could also consider utility from altruism from improving patients’ health Today with Managed Care, MDs have less influence on prices – but may still be able to influence the quantity of services But increase in cesarean deliveries may result due to reimbursement Physician Reimbursement Physician Reimbursement Prior to Medicare Resource Based Relative Value Scale (RBRVS), payment was generally FFS RBRVS has been contentious in terms of how to set relative pay for different services Gave little incentive to limit care and perhaps incentive to overprovide Based on Usual, Customary and Reasonable charges Attracts too many into specialties? Was attempt to rectify disparity relative to primary care physicians Managed care introduced capitation to share (or transfer) risk with physicians Substantial increase in salaried physicians Reduce time spent with patient? Cream skimming? Incentives to shirk? RBRVS Reimbursement RBRVS Reimbursement Medicare bases reimbursement on complexity of procedure, expenses, and geographic variation Proposal to cut Conversion Factor ($/RVU) to $28.39 (down from $36.87) failed to pass Congress Which part of calculation most relevant for private insurers? Medicaid uses as upper bound while private insurers use as lower bound Physician time, effort, supply costs, training, malpractice insurance Generates Relative Value Units and then pay $/RVU RVUs: 1.0 = Chest xray, 10 = carpal tunnel surgery, 50 = lapro. prostatectomy, single artery CABG, 125 = heart or liver transplant Reason for Malpractice Reason for Malpractice System Policing – issue of how to ensure quality of care. Compensation – compensate if care fails to meet community standard. Objective is to create incentives for providers to only provide care for which they are competent and take appropriate care – focus both on process and care. Role based on asymmetric information Provides signal of provider quality Is community local or national? Basis for Malpractice Claims Basis for Malpractice Claims Judge Learned Hand Rule Judge Learned Hand Rule Try to create correct incentives to take care due to info. asymmetries Judge Learned Hand Rule Defensive medicine The use of medical resources beyond point justified by an evaluation of true social benefits and costs. (Can get if physician wants to avoid a legal action at all costs; difficulty in learning standard, inconsistent use of standards.) Hard to identify. Negligence occurs whenever it would cost less to prevent a mishap than to pay for the damages predicted to result from it. Let P = probability of mishap, C = cost of preventing mishap and D = damages incurred. So, if C < P * D and mishap occurred, this is negligent Need all instances with sizeable loss to have suit brought for correct signal Less than 1 in 10 negligently injured patients files a lawsuit and up to only 1 in 25 ever receive compensation Frivolous lawsuits distort picture Hope to have influence on competence and care. Competence = skills and knowledge Care = effort and time taken Does system work? Does system work? Do we know? For system to operate to send correct signal need case to be brought whenever there is any significant negligence. Amount of remedy must signal correct or full loss. Similarly for system to work, all unjustified cases must be correctly identified with no payment made. Signal should be to provider – today we have major role of insurers which weaken feedback system to provider. Cost of medical care, cost of lost time, and loss of utility Problem if reduction in those providing certain types of risky care Evidence re: defensive medicine? Easier to show did tests, etc. than spend time providing information or asking relevant questions. Most cases settled out of court (if expectations for outcome similar). Less than 5 % go to trial. Penalty to provider to be involved in case. Loss of time, reputation. But frequent repetition in set of doctors sued (and rarely loss of license) Patients want to avoid trials with small chance of success and insurers want to avoid cases with high probability of large payout Growth in Malpractice Premiums and Variation by Specialty 1980s – Big awards lead to 1980s – Big awards lead to big reforms California's Medical Injury California's Medical Injury Compensation Reform Act (MICRA) $250,000 limit on noneconomic damages, no limit on economic damages Limits on attorney contingency fees: 40% of the first $50,000, 33% of the next $50,000, 25% of the next $500,000 and 15% of any amount exceeding $600,000 Advance notice of any claim of malpractice against a physician, with a 90day notice of intent to bring suit, allowing the potential to resolve the case prior to suit being filed A statute of limitation of one year from discovery of an injury and negligent cause or three years from the injury. Malpractice premiums grew only 167% in CA since 1980 relative to national growth of over 500% Medicare RBRVS Liability Insurance Adjustment Factor
3.167 3 2.5 2
1.629 1.94 1.5
1.219 1.032 1.289 1
0.599 0.804 0.409 0.245 0.414 0.5 0 ...
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This note was uploaded on 04/14/2011 for the course ECON 329 taught by Professor Classen during the Spring '11 term at Loyola Chicago.
- Spring '11