Supplier-induced demand

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The Impacts of Managed Competition in Netherlands

March 26, 2012 in Health Insurance, International Health Care Systems, Physician Compensation | 1 comment

Financial incentives matter.  If one had to give economists (and health economists as well) a slogan, this would be it.

In 2006, the Netherlands instituted a form of managed competition. According to Van Dijk et al (2012) ”Before 2006, inhabitants had either compulsory social (sickness fund, 62%) or voluntarily private (36%) health insurance depending, among others, on income (below a gross annual income of €33 000 people were socially insured).  This combined system of social and private health insurance was replaced by a compulsory single universal basic health insurance covering a legally defined package of basic benefits including GP care. GPs act as gatekeepers for secondary care…”

The implementation of a managed competition system in the Netherlands cause two major changes to the primary care payment system.   First, cost sharing was abolished for privately insured individuals.  Second, whereas previously doctors treating socially-insured patients received a capitation payment and physicians treating  privately-insured beneficiaries received a fee-for-service payments, after 2006 all physicians received a mixed capitation/fee-for-service payment system.

How did these changes affect the number of primary care visits in the Netherlands?  The authors of the study used a sample of GP practices participating in the 2005-2007 Netherlands Information Network of General Practice (LINH) study to conclude the following:

“Abolition of cost sharing led to a higher increase in patient-initiated utilisation for privately insured consumers in persons aged 65 and older. Introduction of fee-for-service for socially insured consumers led to a higher increase in physician-initiated utilisation.”

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This American Life on America’s Healthcare System

October 17, 2009 in Supply of Medical Services | No comments

This American Life has a two-part series on America’s healthcare system.  Below are some highlights from the first part: More is Less.

On supplier-induced demand

  My old partner that I joined here in 1971 was asked by a friend of his 

 

“…at what level of vision do you do a cataract operation?” 

 

And he said

 

  ”Well, if there’s one ophthalmologist in town, then its 20/200.  If there are two ophthalmologists in town then its 20/80.  If there’s three ophthalmologists in town, then it’s 20/40.”

  • Dr. Frank Reed

On why doctor agree to do unnecessary tests:

Then, I said to him something that I had long known, but had never crystalized for me exactly in this way in that moment.  I said to him, “You know, for me, it really is the right thing for me to do the CAT scan.  If I don’t do the CAT scan, you’ll probably lodge a complaint about me.  If I do the CAT scan you’re be really happy with me.  In addition, I’m almost certain that you daughter is fine, but there’s a maybe a 1 in million chance that she isn’t; that maybe there is a hidden fracture and I’m missing it.  And if that’s the case, the CAT scan will save my butt.  On the other hand, if I do the CAT scan and your daughter gets cancer twenty years from now, no one will blame me.  In addition, I’m spending a lot of time talk to you that I would be doing other things.  If I got the CAT scan, I could do it in a second and it would be done with, it would be easy.  And finally, the really strange thing is, I’ll get paid more if I do the CAT scan…So everything about this was pushing me to do the CAT scan.”

  • Dr. Jerome Hoffman.  In this case, Dr. Hoffman convinced the patient’s family not to do the CAT scan.  

On the need to control costs.

 

And now you always hear “No one should stand between you and your doctor.”  You know what that means, that means no one should ever control utilization, even if its unnecessary, if your doctor thinks its necessary.  No one should every say no.  Almost anyone who’s looked at the data says, “Oh yes, you should.”  

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Why is Medical Care so expensive?

June 1, 2009 in Medicaid/Medicare, Supply of Medical Services | 1 comment

Why does Medicare spend $7,500 for patients in El Paso, Texas but spends $15,000 for patients in McAllen, Texas?  It McAllen richer? Does McAllen receive better care?  Are patients sicker in McAllen?  

“Come on” the general surgeon finally said. “We all know these arguments are bullshit.  There is overutilization here pure and simple.”  Doctors, he said, were racking up chanrges with extra tests, services, and procedures.

The surgeon came to McAllen in the mid-nineties and since then he said, “the way to practice medicine has changed completely.  Before, it was about how to do a good job. Now it is about ‘How much will you benefit?’”

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Cutting Medicare reimbursement increases the quantity of medical care

May 5, 2008 in Supply of Medical Services | Permalink

Traditional economic theory suggests that when the price of a good falls, the amount supplied will fall as well. Most economists always assume that the supply curve is upward sloping.

But that is not always the case in medical world. Because a physician serves both as the patient’s advisor and the supplier of medical treatment, physicians can induce patients to increase the amount of medical care they wish to receive. Patients are easily convinced because of 2 market failures: asymmetric information and moral hazard.

Asymmetric information means that the physician know more about your health condition than you do. Thus, patients rely on the advice of the physician. Moral hazard occurs because patients have health insurance. Since patients do not pay for the care they receive (or pay for it at a reduced rate), they are very amenable to follow the doctors orders.

A 1998 letter from the Health Care Financing Administration (HCFA) found that it was typical that a 50% offset will occur when Medicare payments are reduced. This means that a 20% reduction in price, will lead to a 12.5% increase in quantity. Overall, this will lead to only a 10% decrease in total cost. Since 10% is 1/2 of 20%, we have a 50% offset. Physicians are increasing the quantity provided in order to make up for the income lost from lower Medicare reimbursement rates.

This is a classic example of supplier induced demand.

An article by Yip (JHE 1998) found that this was the case for coronary artery bypass graft (CABG) surgeries as well.

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