Physician Compensation

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How does managed care affect physician incentives to reduce care?

October 30, 2008 in Physician Compensation, Supply of Medical Services | Permalink

Patients generally believe that managed care systems are put in place to restrict their access to care.  Many patients believe that physicians who receive capitation compensation will provide less care to their patients than physicians who are paid on a fee-for-service basis.  A paper by Fang and Rizzo (2008) investigates whether or not this is really they case.

The authors find that “both capitated and noncapitated managed care significantly increased physician incentives to reduce care during 2000-2001.”  This is just what economists would predict.  When physicians receive capitation payment, they receive non-positive marginal revenue, giving them an incentive to reduce care.

By 2004-2005, however, Fang and Rizzo found no statistically significant difference in physician desire to reduce care between physicians in managed care organizations and those who were not.  Capitation compensated doctors still were more likely to reduce care levels than other doctors but this was only marginally statistically significant (p<.08) and of a much smaller magnitude.

What can we conclude from this?  Likely it is the case that over time, managed care organizations have become less managed; non-managed care organizations have put in place more restrictions over time.  Separately identifying how managed care incentives (e.g., referral restrictions) and physician compensation incentives (i.e., capitation vs. fee-for-service) impact care levels is very important as insurance plans become more homogeneous.

If you are interested in how physician compensation affects surgery rates, you can read my paper “Operating on Commission: How physician financial incentives affect surgery rates.”

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Physician Compensation in Canada

October 17, 2008 in Physician Compensation | Permalink

Does physician compensation affect the quantity of medical care provided?  My paper “Operating on Commission” claims that the answer is yes.  I find that surgery rates increase 78% when patients switch from capitation to fee-for-service (FFS) specialists.

A paper by Devlin and Sarma (2008) examines a similar question for Canadian family physicians.  Since the inception of Canadian Medicare, 89% of family physicians have been paid on a fee-for-service basis.  The authors aim to estimate how fee-for-service compensation affects the quantity of medical care controlling for the fact that physicians who favor more aggressive treatments likely will sort into fee-for-service compensation schemes.  

The authors control for the endogeneity problem with using 2 econometric specifications.  The first uses an instrumental variables (IV) specification with 4 instruments.  The first three instruments are physician preferences for research, teaching, and non-work interests.  Physicians who enjoy teaching and research are more likely to prefer salaried compensation schemes.  The final instrument is the physician’s response to the compensation scheme they prefer.  Each of these four instruments is likely correlated with the actual way the physician is compensated, but the instrument must be uncorrelated with unobserved factors which effect physician quality.  

The second econometric specification is the treatment effects estimator (the restricted control function approach).  The treatment effects estimator assumes the following econometric structure:

  • ln(qi) = Xiα + βRi + εi
  • ΔVi = Ziγ + ui

The first equation shows how the physician remuneration scheme (Ri) affects the log quantity of medical care [ln(qi)] after controlling for covariates (Xi).  The second equation gives physician’s latent utility (ΔVi) of choosing one remuneration scheme over another.  The treatment effects specification estimates the coefficients based on functional form; the first equation is estimated with OLS and the second equation is estimated with a probit model.

With these two specifications, the authors find strong evidence that physicians select into different compensation schemes based on their practice styles.  ”…those who choose a non-FFS environment engaged in more patient visits per week than those who choose the FFS scheme.”  After controlling for the selection effect, the authors found that that the direct incentive effect of physician compensation was strong.  ”FFS schemes appear to strongly encourage physicians to see many more patients relative to alternative remuneration schemes.”

As I find in my “Operation on Commission” paper, financial incentives do matter.

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Cochrane Review: The effect of capitation, fee-for-service (FFS) and mixed payment systems on primary care physician behavior

July 21, 2008 in Academic Articles, Physician Compensation | Permalink

Primary care physicians can be compensated in a number of ways. The most popular are capitation, fee-for-service, salary, or some mixture of the three. But how does the physician compensation method affect care levels? This is the question Gosden et al. (2000) try to answer in their Cochrane review. The authors search the literature for randomized trials or controlled before and after studies in order to see how changing physician compensation affects the quantity and quality of care.

A summary of the 4 papers which met Gosden et al.’s criteria is below.

Category Davidson 1992 Hickson 1987 Krasnik 1990 Hutchinson 1996
Country US US Denmark Canada
Type Randomized Trial Randomized Trial Before-and-After Before-and-After
Payment i) age-adjusted capitation; ii) Medicaid FFS; iii) more lucrative FFS i) FFS; ii) Salary Control: Cap/FFS mix; Intervention: Capitation only, changes to Cap/FFS mix Before: FFS; After: mixed capitation, ambulatory care incentive
Physicians Primary Care Providers (PCPs) Residents General Practitioners (GPs) GPs/Family Physicians
Results Comparing FFS and capitation, there was no difference in the number of PCP visits. There was no difference in the number of patients attended The number of face-to-face and phone visits was higher in the control group than the intervention group. Hospital days decrease in all groups, but the change is similar across all payment types.

Controlling for covariates, there were 0.5-0.6 more visits for the capitation group compared to the Medicaid FFS. There were more ER visits for the salaried group compare to the FFS group. After the FFS was implemented in the intervention group, visits increased and converged to that of the control group.

The new, more lucrative FFS increase PCP visits by .8-.9 per patient compared to the Medicaid FFS. Salaried doctors have fewer well-child visits per enrollee After the FFS implementation [intervention group], the number of diagnostic and curative services order increased.

PCPs paid via capitation used fewer specialist and hospital resources After the FFS implementation [intervention group], the number referrals to specialists fell

Patients were less likely to reach recommended visit levels in capitation compared to FFS

The original four articles:

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Delaying the Medicare Paycut

July 16, 2008 in Medicaid/Medicare, Physician Compensation | Permalink

The controversy as to how much Medicare should pay doctors is continuing to brew (see N.Y. Times article).  Congress passed a law overriding a pay cut to Medicare doctors.  Although the president vetoed the bill, Congress garnered enough support to override the veto.

Dr. Rich of The Covert Rationing Blog claims that the Medicare reimbursement mechanism “is so fundamentally ridiculous that it can only be understood by recognizing that it is a fairly typical bureaucratic attempt to covertly ration healthcare.”

How would you enjoy having legislators determine your salary?

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Health Insurance, Physician Compensation and the Quantity of Medical Care

May 30, 2008 in Health Insurance, Hospitals, Physician Compensation, Supply of Medical Services | Permalink

Many studies have attempted to determine how the manner in which physicians are compensated by health insurance companies affects the quantity of medical care provided. Today I will summarize some seminal studies in this field.

Epstein, Begg and McNeil (NEJM 1986)

In this study, the authors examine whether or not there is a difference in the rate of ambulatory testing between physicians in a large fee-for-service (FFS) group and a large prepaid group. The physicians were internists who were caring for patients with uncomplicated hypertension. The authors found that 50% more electrocadriograms (EKGs) were obtained in the FFS group and 40% more chest radiographs were obtained in the FFS group [compared to the prepaid group]. There did not seem to be any difference in testing rates between FFS and prepaid doctors for blood counts and urinalyses. This is not surprising, however, because the profit physicians earned from EKGs and chest radiographs was significantly higher than the profit they made from each blood count or urinalysis. Further, the cost of preforming EKGs and chest radiographs was much higher than the cost to preform blood counts and urinalyses.

Thus, this study concludes that patient testing rates are different between FFS and prepaid doctors, but this effect is only observed for high cost and/or high margin ambulatory tests.

Newhouse and Marquis (JHR 1978)

Physicians may treat patients differently based on how the patient’s insurance company pays them. However, the patient base of most physicians includes a wide variety of health plans and thus it may be difficult to discriminate care levels by insurance type. The “norms hypothesis” predicts that physicians treat patients in accordance with the average or modal insurance coverage in a given metropolitan area. In other words, “the level of a community’s insurance coverage determines physician norms.” If this were true, it would imply that there would be significant variation in medical care quantities across geographic regions but very little variations by patient for each physician.

The authors use data from the RAND Health Insurance Study in Dayton, Ohio. The authors test whether or not the patients own insurance rate will affect hospital admissions, the length of a hospital stay or the number of physician office visits. The authors find no evidence that community-level coinsurance rate impact hospital admissions, while the patient’s own coinsurance rate significantly affects hospital admission. In the 1963 data, neither the community insurance variable nor individual insurance variable had any affect on the length of a hospital stay or the number of physician visits, however in the 1970 data, individual coinsurance rates had a large impact on the length of a hospital stay or the number of physician visits, while the community level coinsurance rate had no impact on these dependent variables.

Hellerstein (RAND J Econ 1998)

Most health policy wonks believe we could significantly reduce health care costs without sacrificing quality by using more generic drugs. Many states have passed “permissive substitution laws” which allow pharmacists to substitute generic drugs in place of name-brand ones unless the physician explicitly instructs them not to do so. Other states use a “two-line” prescription method. With these prescription pads, doctors can sign their name in one of two spots: the first indicates that generic substitution is allowed and the other indicates that the brand name option is medically necessary.

Hellerstein uses data from the 1989 NAMCS, and finds that “30% of the unobserved (residual) variance in the prescription choice is physician-specific, rather than patient specific.” Does an individual’s health insurance influence the physician’s prescribing behavior? This paper finds that an individual’s health insurance does not influence prescribing decisions. However, “conditional on a patient’s insurance status, a patient who switches to a physician with a marginally greater fraction of HMO patients is 10.12% more likely to receive a generically written prescription.”

Summary

Why does the composition of the physician’s patient base seem to matter for Hellerstein (1998), but not for Marquis and Newhouse (1978) or Epstein, Begg and McNeil (NEJM 1986)? The main reason is likely that Hellerstein examines medical care in which physician do not receive any compensation. Physicians receive no more or less revenue from prescribing name brand compared to generic drugs and thus have no incentive to find out how they are being paid by each individual’s insurance company. On the other hand, Marquis and Newhouse found that hospital admissions, the length of the hospital stay, and the number of office visits is affected by an indvidiual’s health insurance variables since this type of medical care is high margin and high cost. Similarly, Epstein, Begg and McNeil (1986) found that how an individual’s insurance company compensates physicians matters for high margin, high cost EKGs and chest radiographs, but does not seem to matter for low margin, low cost blood counts and urinalyses.

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Custom-made versus ready-to-wear treatment

May 29, 2008 in Pharmaceuticals, Physician Compensation, Supply of Medical Services | Permalink

Many patients have an idealized view that physicians customize their treatments for each individual patient.  For instance, do physicians tailor prescription dosage based on individual characteristics and responses over time, or will they simple prescribe the standard dosage?

A paper by Frank and Zeckhuaser (JHE 2007) find that norm-following behavior (rather than patient-by-patient customization) is very prevalent.  The authors claim that there are 4 reasons why a physician would strictly adhere to a professional norm rather than customizing their treatments to maximize the quality of care for each individual patient.

  1. Communication costs. In order to prescribe treatment outside of the norm, the physician must communicate their reasons for doing this to the patient.  If patients have preconceived notions of how they want to be treated, physicians may have to expend significant effort to convince the patient that this individualized treatment is the best way to proceed.
  2. Cognition costs. As every person knows, exerting mental effort is costly.  Physicians can cut down on the cost of diagnosis by using heuristics.  These shortcuts may not be optimal for every patient, but they generally “do a reasonable job for a broad array of cases” and also cut down on the physicians mental computing costs.
  3. Coordination costs.  Physicians often have to work with other physicians.  The more physicians customize their treatment, the more difficult it is to communicate this alteration in care levels with specialists and thus more difficult to coordinate care.
  4. Capability costs.  Physicians are trained in certain treatments.  If a new, better treatment comes along, the physician has a choice of either 1) doing the old treatment, 2) learning the new treatment poorly and performing the new treatment, or 3) learning the new treatment well and performing the new treatment.  Choice (3) may be optimal from the patient’s point of view, but for the physician it may involve significant fixed costs involved in acquiring the human capital necessary to preform the new procedure.  If the physician decides not to incur the cost to learn the new technique well, it may in fact be optimal to choose option (1) over option (2) and thus old techniques will persist.

While these four costs will push physicians towards following norms, superior patient outcomes may compel doctors to customize their care.

Results

Frank and Zeckhuaser use data from the 2004 NAMCS to determine whether or not physicians customize the length of the patient visit or prescribing behavior.  The authors find that customization in prescribing behavior occurs most frequently for patients with chronic conditions.  This is likely because altering the “standard” treatment has more benefit for ‘repeat-visit’ patients than those with simply an acute illness.  However, race, gender, number of physician visits and insurance type do not affect prescribing behavior.

Regarding length of the office visit, the most important factor is whether or not the patient is a new patient.  Individuals who were self-pay had shorter visits while those with had Medicare insurance had longer visits, but these results were fairly small in magnitude.  Twenty-eight percent of the differences in the length of an office visit was due to physician specific factors.

Overall, the evidence shows that physicians often follow norms rather than customize care.  Also, it seems that the manner in which physicians are paid has no bearing on how they treat patients.  However, this is likely due to the fact that 1) it is very difficult to customize visit length especially when physicians are dealing with eleven managed care contracts on average [see other evidence in "Time Allocation" post on Tai-Seale et al. (2007) or the "Doctors Behave" post on Glied and Zivin (2002)], and 2) physicians do not receive compensation for pharmaceuticals and thus have no financial incentive to tailor treatment to patients based on their individual insurance.

My “Operating on Commission” paper does find that physicians tailor surgery treatment based on how they are compensated, but this is likely because 1) these are high margin procedures where it is worth the physicians time to find out how they are being paid, and 2) unlike pharmaceuticals, the surgeon is the one who receives the compensation directly.

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