Health Economics- Lecture Ch15
-
Upload
katherine-sauer -
Category
Documents
-
view
220 -
download
0
Transcript of Health Economics- Lecture Ch15
-
8/3/2019 Health Economics- Lecture Ch15
1/42
The Physicians Practice
Dr. Katherine Sauer
Metropolitan State College of Denver
Health Economics
-
8/3/2019 Health Economics- Lecture Ch15
2/42
Chapter Outline:
I. A Model of the Physicians PracticeII. Supplier-Induced Demand
III. Small Area Variations
IV. Other Issues
-
8/3/2019 Health Economics- Lecture Ch15
3/42
I. A Model of the Physicians Practice
McGuire and Pauly (1991) describe physicians as utility
maximizers which means that physicians value items
besides profit.
In this model, the physician gets utility from
net income and leisure,
and disutility frominducement, (the physicians own efforts to induce
patients to buy more care than appears medically
necessary.)
-
8/3/2019 Health Economics- Lecture Ch15
4/42
U =f( , L, I)
is net income
L is leisureI is inducement
-
8/3/2019 Health Economics- Lecture Ch15
5/42
Hours of Leisure
Hours of Labor
Income
24
Assume working returns
constant revenue.
- working for one
more hour means yourincome increases by
w and you get one
less hour of leisure.
A. The income leisure tradeoff:
-
8/3/2019 Health Economics- Lecture Ch15
6/42
Hours of Leisure
Hours of Labor
Income
24
As the wage increases, the
income line gets steeper.
income w1income w2
income w3
The physicians optimalbalance between labor and
income changes.
-
8/3/2019 Health Economics- Lecture Ch15
7/42
wage
Hours of
Labor
w3
w2
w1
Initially, the physicians
income effect dominates the
substitution effect.- higher wage leads
him to work more
There comes a point wherethe substitution effect
dominates.
- higher wage leads
him to work less
An increase or decrease in income causes the physician
to reevaluate the choice of how much to work
L1 L2
L3
-
8/3/2019 Health Economics- Lecture Ch15
8/42
B. The income inducement tradeoff:
- disutility from inducement
U1
U2
Inducement
Income
-
8/3/2019 Health Economics- Lecture Ch15
9/42
Inducement
Income
A certain level of
income will be
achieved evenwith no
inducement.
m is the rate ofprofit per patient
care unit
Q0 is the number
of patient care
units without
inducement.
mQo +mI
mQo
-
8/3/2019 Health Economics- Lecture Ch15
10/42
Inducement
Income
The optimal level
of inducement is
found at thetangency between
the income line
and indifference
curve.
This physician
induces QI* non-
medicallynecessary care.
mQo +mI
U
QI*
mQo
-
8/3/2019 Health Economics- Lecture Ch15
11/42
Inducement
Income
If the profit rate
per patient falls,
the income line islower and flatter.
Now the optimal
level ofinducement is
higher.
m1Qo +m1I
U1
QI1*
m2Qo +m2I
U2
QI2*
-
8/3/2019 Health Economics- Lecture Ch15
12/42
C. Do Physicians Respond to Financial Incentives?
Nassiri and Rochaix, (2006)
when physicians are paid per service provided, they
provide more services than when they are given a fixed
total payment (capitation)
Studies also suggest that physicians respond to income
pressures on their practice by striving to increase their
incomes (Iversen, 2004; Gruber and Owings, 1996;
Quast, Sappington, and Shenkman, 2008; Rizzo and
Zeckhauser, 2003, 2007).
-
8/3/2019 Health Economics- Lecture Ch15
13/42
II. Supplier-Induced Demand (SID)
On becoming ill, consumers hire health care professionals.
In medicine, we identify the physician as the agent, and
the patient as the principal.
The policy concern is that out of self-interest physicians
may violate their roles as agents.
-
8/3/2019 Health Economics- Lecture Ch15
14/42
Physicians provide care, but also sell it.- competition lowers the per-patient profit rate
- increased inducement
An increase in physicians would cause an increase in thesupply of services, but also an increase in demand for
services (induced demand).
-
8/3/2019 Health Economics- Lecture Ch15
15/42
Health economists have modeled supplier-induced
demand for at least two reasons:
- to understand the motivations of physicians, how
their incentives affect their practice
- models are needed to understand the data we
observe
-
8/3/2019 Health Economics- Lecture Ch15
16/42
A. Supply and Demand Model
Even without SID, the market predicts that an increase in
supply of physicians will increase the quantity of services.
- supply shifts right higher quantity, lower price
If demand increases such that the price of service rises,
then SID is identified (Reinhardt Fee test).
But, maybe physicians respond to competition byincreasing their quality. (dont need SID to explain higher
quantity)
-
8/3/2019 Health Economics- Lecture Ch15
17/42
B. Target Income Hypothesis (TIH)
This argues that physicians have desired incomes that they
strive to achieve or to restore whenever actual income falls
below the targets.
This target income model is a special case of the
benchmark model, though a relatively extreme one.
This model has received criticism because- income is the main focus of the physician
- but not income beyond the target
-
8/3/2019 Health Economics- Lecture Ch15
18/42
Inducement
Income
If the profit per patient falls, so does the physicians
income.
m1Qo +m1I
U1
I1
m2Qo +m2I
U2
I2
1
2
The TIH says
this physician
will try to
increase their
income.
-
8/3/2019 Health Economics- Lecture Ch15
19/42
Inducement
Income
The physician can increase income by increasing
inducement.
m1Qo +m1I
U1
I1
m2Qo +m2I
U2
I2 I2
1
2
2'
The dashedline is parallel
to the original
income line,
and thentangent to the
new level of
utility.
-
8/3/2019 Health Economics- Lecture Ch15
20/42
Inducement
Income
This shows the change in inducement from removing
income from the physician.
m1Qo +m1I
U1
I1
m2Qo +m2I
U2
I2 I2
1
2
2'
The incomeeffect is the
distance I1 to
I2.
-
8/3/2019 Health Economics- Lecture Ch15
21/42
If instead of having a target income a physician is a profitmaximizer, then a reduction in the profit rate results in an
income effect equal to zero.
- profit-maximizer gains utility only from
more net income
- values inducement only if it brings in more
income
-
8/3/2019 Health Economics- Lecture Ch15
22/42
C. McGuire-Pauly synthesis:
the size of the income effect is critical tounderstanding SID behavior
A lower profit rate (m) will have two effects on
inducement:- substitution effect: when inducement is less
profitable, providers will substitute away from it
- income effect: decreased income will makeinducement more attractive
-
8/3/2019 Health Economics- Lecture Ch15
23/42
D. The Parallel Between Inducement and Marketing
Stano (1987)argued that an influx of new competition (which reduces
the physicians profit rate) may lead physicians to induce
more, or less, depending on the cost structure of the
firms production and its advertising.
If the physicians SID is analogous to advertising/
inducement, then inducement would usually decline in an
increasingly competitive market.
-
8/3/2019 Health Economics- Lecture Ch15
24/42
E. What Do the Data Say?
Two criticisms were raised about much of the earlier
SID work.
- many of those studies could not distinguish
between the SID model and the conventional supplyand demand model.
- many estimates of the SID effect proved to be
statistically flawed
-
8/3/2019 Health Economics- Lecture Ch15
25/42
McGuire (2000)showed that the implications of availability on fees in
when physicians operate in monopolistically competitive
markets are not so clear.
Feldman and Sloan (1988)
show that if physicians can adjust their quality in
response to increased competition, then higher fees could
result even when there is no inducement.
-
8/3/2019 Health Economics- Lecture Ch15
26/42
Rizzo and Blumenthal (1996)
use surveys of physicians to compare their desired
incomes to their actual current incomes.
Physicians with greater gaps were found to demand
greater price increases.
Rizzo and Zeckhauser (2003)
find the physicians whose current incomes fall below
their reference incomes are observed to show greater
income growth than the average of other physicians in
subsequent periods.
-
8/3/2019 Health Economics- Lecture Ch15
27/42
III. Small Area Variations (SAV)
Are physicians themselves always well informed?
Medical and surgical use rates can vary even in a small
geographical area.
-
8/3/2019 Health Economics- Lecture Ch15
28/42
A. How to Measure
The Coefficient of Variation (CV) relates the standard
deviation of observed medical use rates to the mean of
the same measure.- then divide by the mean (adjusts for size of the
rate being studied)
0.00 to 0.10 is low variation
0.10 to 0.20 is moderate variation0.20 and up is high variation
-
8/3/2019 Health Economics- Lecture Ch15
29/42
Extremal Ratio ratio of the largest rate observed acrossthe small areas to the smallest rate observed
-
8/3/2019 Health Economics- Lecture Ch15
30/42
Variations by Medical Procedure Type
-
8/3/2019 Health Economics- Lecture Ch15
31/42
B. Causes of the Variation
Much of the SAV work focuses on- contribution of socioeconomic characteristics of
the population
- role of the availability of supplies of hospital and
physician services
The studies together reached two conclusions:
1) Supply variables are important and demand
characteristics play a somewhat lesser role though bothare statistically and materially significant.
2) much variation is still left unexplained
-
8/3/2019 Health Economics- Lecture Ch15
32/42
C. The Physician Practice Style Hypothesis
Practice style probably varies among physicians due to
an incomplete diffusion of information on medical
technologies.
Wennberg (1984)
argued that much of the observed variation is closely
related to the degree of physician uncertainty with
respect to diagnosis and treatment.
-
8/3/2019 Health Economics- Lecture Ch15
33/42
Epstein and Nicholson (2005)
find that a physicians residency has relatively little
influence on his practice style.
Stronger influences are his peers with the hospital where
he practices as well as his peers in the other hospitals in
his region.
-
8/3/2019 Health Economics- Lecture Ch15
34/42
Studies show that information programs directed atphysicians can alter their behaviors and thus presumably
their practice styles.
One study found that an informational programsignificantly affected the tonsillectomy rates in 13 New
England areas.
-
8/3/2019 Health Economics- Lecture Ch15
35/42
Wennberg and Fowler (1977)
found that morbidity and many socioeconomic
variables were not sufficient in explaining the
variations in a region.
Concluded that variations in use rates probably are due
largely to practice style differences across the small
areas.
-
8/3/2019 Health Economics- Lecture Ch15
36/42
Phelps and Parente (1990)
found that standard demand and supply variables
typically account for between 40 and 75 percent of thevariation in their study of 134 separate diagnostic
categories.
Escarce (1993)found that 43 percent of the variation in cataract surgery
rates for the Medicare population is explained by
socioeconomic variables.
-
8/3/2019 Health Economics- Lecture Ch15
37/42
D. Social Cost of InappropriateUtilization
The most important issue in the SAV literature is the
proposition that substantial variation in utilization rates
is an indication of inappropriate care.
Phelps and Parente find that the welfare loss due to
variations from true practice in the nation total $33
billion.
-
8/3/2019 Health Economics- Lecture Ch15
38/42
Inefficiency from Misinformation about Benefits
MB,
MC
Rate ofUtilization of
Intervention X
MC
True MBMB as perceived byDoctor 1
MB as perceived by
Doctor 2
R*R1 R2
social loss
-
8/3/2019 Health Economics- Lecture Ch15
39/42
IV. Other Issues
A. Physician Pricing and Price Discrimination
Physicians in private practice have some degree of
monopoly power (monopolistic competitors)
Arbitrage of physician services isnt possible.
Price discrimination is therefore possible.By segmenting their market and charging
different prices to different patients for the same
services, physicians can increase revenue.
-
8/3/2019 Health Economics- Lecture Ch15
40/42
B. Paying for Outcomes:
fee-for-service vs fee-for-outcome
Fee-for-outcome is rare in the developed world but fairly
common among traditional healers (ex: in Africa).
Fee-for-outcome is difficult because of the uncertainty in
treating heath issues.
Outcome based contracts are more successful when both
the patient and the physician work together.
-
8/3/2019 Health Economics- Lecture Ch15
41/42
Key Points
Our benchmark model depicts the physician as someone
who values positively net income, and leisure, anddislikes inducing patient demand.
The model shows that for the supplier induced demand
(SID) hypothesis to be supported, the physicians incomeeffect must be positive and substantial.
Small area variations can be understood as a result of
uneven diffusion of medical information to these same
physicians.
-
8/3/2019 Health Economics- Lecture Ch15
42/42
Discussion Questions:
What forces limit a providers ability and willingness toengage in SID?
In the profit-maximizing model of SIC, what are the
costs to the physician of inducement?
Assuming that SID is prevalent and substantial, what
are the implications for policy?