Saturday, November 4, 2017

REPOST: Fee-for-service vs. capitation: 10 fewer amputations per 1000

Fee-for-service vs. capitation: 10 fewer amputations per capita

It is difficult to align the incentives of physicians (making money) with the goals of patients (low cost, high quality care) due to asymmetric information:  only the physician knows what the patient wants.

What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

Here is what happens:
  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 
BOTTOM LINE:  Incentives matter
 “We've found that U.S. private insurers have created an operating model that can deliver better care at a lower cost and have a major role to play in the ongoing national efforts to improve health care quality,” said Stefan Larsson, a BCG senior partner and coauthor of the report. “Quite simply, we’ve found that the more aligned the care, the better the quality delivered.”


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  2. I think in this matter, not only do you have to analyze the alignment of both physicians and patients goals. You have to identify the potential for both adverse selection and moral hazard. Froeb et al (2014), teaches that because low quality workers typically have worse outside options, they are more likely than good ones to select an offer of employment. Lieber (2013), Writes that malpractice reforms tend to reduce physician liability for harming patients. Because these reforms are passed at the state level, the costs of harming patients vary widely by geographic location. He explores whether malpractice reforms affect where physicians choose to practice and whether physicians who relocate in response to reforms are particularly prone to commit malpractice. States he writes, a own reforms cannot separately identify moral hazard from adverse selection. As I agree, incentives matter and we read are linked to better care with better cost. We must also be mindful of adverse selectiong and moral hazard that can come with these incentives. Lieber (2014),suggests that physicians who relocate in response to non-economic damages caps are more likely to commit malpractice

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning.

    Lieber, E. M. (2014). Medical Malpractice Reform, the Supply of Physicians, and Adverse Selection. The Journal of Law and Economics, 57(2), 501-527. doi:10.1086/675236

  3. Improving health care while controlling cost is a major topic for the United States and involves the health care providers, the patients, and sources of payment whether individuals, insurance, or the government (Kolatamarch, p. 1). Managerial economics can be a helpful tool in the improvement process. One issue that has been raised is the elasticity of demand relative to the presence or absence of co-payments for medical coverage. According to a study by Yaremchuk & Nelson (p. 1), utilizing a hospital emergency room for non-emergency conditions decreased by 42% when the co-pay for an HMO went from $0 to $50. Similarly, the demand for emergency conditions decreased by 30% for the same change in co-pay.

    This is also an example of adverse selection where the patient seeking the care is more informed than the hospital emergency room on their needs and especially their alternatives. By using the co-pay, they are increasing the elasticity which drops the emergency room demand for non-emergency care and assumedly increases demand for walk-in clinics, regular doctor visits, and deferring care. Several other economic concepts related to adverse selection are also common. For example, screening is used by the emergency room to distinguish emergency patients from non-emergency (Froeb, p. 245). This can be an assumption that a patient arriving by ambulance is more emergent than a walk-in. Further, they conduct a triage process during the check-in and non-emergent patients can be waiting for a considerable time both based on prioritization of care and to discourage non-emergent visits. Signaling is also possible if the patient knows the advantage in speed of care if arriving by ambulance and by stating they are having chest pain (Froeb, p. 247).

    While co-pays should not be so high as to discourage true emergency needs, they are a valuable tool in helping match need to level of care and cost.


    Froeb, L. et al (2016), Managerial Economics: A Problem-Solving Approach, 4th edition, Boston, MA: Cengage Learning

    Kolatamarch, G., (2010), Law May Do Little to Help Curb Unnecessary Care, The New York Times, downloaded from

    Yaremchuk, K. and Nelson, M. (2010), Copayment Levels and Their Influence on Patient Behavior in Emergency Room Utilization in an HMO Population, Journal of Managed Care Medicine, Volume 13, No. 1

  4. Moral Hazzard and Adverse Selection: Capitation

    I used to work in a medical environment and experienced capitation payments by CDPHP (Capital District Physicians Health Plan), an insurance company based in upstate New York. The capitation plan was for specific covered lives on a certain small group of patients who saw a doctor in the outpatient clinic setting. The insurance company negotiated and set the rate. In this environment we monitored the capitated monthly payment by patient against what we would have received under the previous office payment arrangement. This arrange could have presented the moral hazard for both, the clinic and the patient. The clinic could have kept the money without patient follow up thereby increasing profit on the contract or the patients who knew payments were capitated could have taken advantage of potentially unnecessary visits just because there was no additional charge.

    Most patients were unaware of the capitation arrangement which creates an adverse selection situation and so they wouldn’t know if they were not receiving needed follow up care to enhance the profits under the negotiated capitation contract. Patients who trust their doctor rely on the doctor to let them know when follow up care is needed.

    In this case medical records were reviewed by a different doctor to ensure that quality and appropriate care had been rendered. This internal control helps to avoid the inappropriate circumstances that could have happened. In the end the contract was not renewed by the insurance company. The insurance company reviewed patient records and they realized that the capitated rate was too high and it cost them more money.


    Froeb, L. M., McCann, B. T., Shor, M & Ward, M. R. (2016). Managerial economics: A problem solving approach. (4th ed.). Boston: Cengage Learning.

    Froeb, L. (2017, November 4). Fee-for service vs. capitation: 10 fewer amputations per capita. Retrieved on December 15, 2017 from

  5. So glad that I have a US private insurer. I didn’t understand why when I went to the drug store to pick up a new prescription and they told me the co-pay was $1,000! “No way- I have prescription drug coverage and copays are $5.00.” Well, apparently, this drug was excluded from my formulary. What to do? The Pharmacist comes out and asks if I have health care coverage through a private insurer – my employer. Why, yes. “Alright then, sign this card and you can have the prescription for free!” I signed. I have the drug for free, but who pays the $6,000 bill? The drug company pays the co-pay. My employer pays the $6,000. I don’t really think about until I get home and look at the receipt. Does that stop me from using it and refilling every month? No. I refill it and tell my co-workers. Now I know two others using the same drug under the same circumstances. This is a standard “moral hazard” problem. We are all feeling better physically, but I’m feeling torn at every refill. Patients in Medicare Advantage plans are not eligible for this “special card”. I’m sure they really need it more than a working person. I’m not sure I’m in agreement that Medicare Advantage plans are all that good and improving at every level.
    Adverse selection in healthcare is alive and well during our open enrollment process. Among all of our health care plan choices is one that offers zero co-pays for diabetic supplies. Even though you have to use a stricter physician in-network list, all of our diabetics select this plan based on this need. They choose the plan knowing their ailments when the insurance company does not. But why do they offer this? The insurance company believes that they can make up the difference in co-pay costs versus making additional money by controlling the choices of doctors and facilities in their network. This would be anticipating adverse selection. Just another vicious circle in our healthcare world.
    Froeb, L., McCann, B., Shor, M., Ward, M., 2016. Managerial Economics A Problem Solving Approach, Boston, MA. Cengage

  6. The elasticity of demand relative to co-payments for medical coverage shows itself in changes in patient behavior based on costs such as co-pays. As an example, when my children were young and there were no night-time options for care, we would frequently be sent to the emergency room for sprains, breaks, ear infections, and every other childhood illness scare. About 8 years ago, our copay for the emergency room went from $25 to $100 if you were not admitted. At the same time, two different orthopedic groups opened ortho-based urgent care centers, and three family medicine providers opened urgent care centers within 10 minutes of our house. My children, now adults, have not seen an emergency room since these centers were opened; the co-pay for urgent care ($50) versus my family doctor ($20) also means that whenever possible, we go for medical care to the family doctor rather than the urgent care center. Demand drops & behaviors change when the price increases; these changes free up emergency rooms to take care of more emergent situations and patients without medical insurance. Speaking of patients without medical insurance, this situation also presents a moral hazard; the physician in any of these scenarios must provide the best level of care he or she is able to offer to a patient, regardless of the patient’s ability to pay. The physician knows what the patient needs, and may have some idea of the patient’s financial situation. There’s an incentive conflict here; the patient wants the best available care at the lowest cost, and the physician wants the highest possible reimbursement. Many hospitals and private groups struggle with how to align the goals, or at minimum meet the needs of both parties. Those with insurance will find their insurer negotiating on its own behalf, which aligns with the patient in wanting the best available care, but when negotiating with hospitals or nursing homes, the insurer may not have the ‘best care at the best costs’ as its goal; it is more likely to want acceptable care at a lower price, thus forcing physicians and patients to make trade-offs in treatment and medication options. Without insurance, the care planning becomes much more starkly obvious; patients without insurance often cannot afford to pay out of pocket for expensive, possibly more effective drugs and treatments, and have no one to negotiate for them. The government’s safety net Medicare/ Medicaid programs cause the same conundrum offering by insured patients; best care at a higher price, or adequate care at a reasonable price?

  7. I’ve believed for years that preventive services save money, so I never understood why we were forced by insurance companies, due to non-coverage of preventive medicine, to wait until a crisis occurred so we could bandage and repair rather than avoid with prevention methods. It’s nice to see things are turning around. Since the managed care plans can offer patient incentives, they can push preventive, less costly means of taking care of oneself so that costlier medical needs can be avoided. This is a win-win for both the patient and the insurance company.
    This idea can be best demonstrated through moral hazard and adverse selection since they both offer concrete, possible explanations for the behavior of patients within managed care plans. Rather than being able to be lax due to having insurance, consumers are given health conscious incentives to pay lower premiums. The managed care system is designed with money saving ideas that are proactive and preventive rather than waiting for medical complications or emergencies to arise. Managed care policies are priced to be affordable, but at the same time, have expectations. Insured members receive the benefit of lower premiums by utilizing preventive methods such as gym memberships, nutritionists, well clinic appointments, and regular check-ups. These items are less costly than the alternatives so the managed care plans options become affordable. It’s nice to see healthy alternatives becoming a fad.

  8. Asymmetrical information is nothing new and a fairly common experience. A lack of information, or hidden information, can lead to adverse selection where there is one (or more) parties in possession of more information than another (Froeb, McCann, Shor, & Ward, 2016, p. 249). This is also why we use screening and signaling to probe for more information and deliver our own information to eliminate any repercussions of an asymmetrical situation, and achieve the most out of our decisions and circumstances.
    Adverse selection becomes moral hazard when a party is hiding actions from another (Froeb, McCann, Shor, & Ward, 2016, p. 260). Michele G’s personal example of her experience with private insurance is a great example of this. She wasn’t really sure where the burden of her prescription cost fell, or who else might get similar services, and why. Not knowing the “ins and outs” of our insurance, especially an understanding of why insurance companies and physicians making certain decisions (prescribing and covering one brand over another) is an example of a moral hazard because this information is often intentionally kept from us so that other parties can hold an advantage.
    Medicare Advantage is designed to eliminate adverse selection and moral hazard in two ways. First, it acts to eliminate situations of asymmetrical information through best practices and care management. When all parties are informed, better and more beneficial decisions can be made. And second, it acts to align the goals of insurance, physicians and customers, and therefore eliminates incentive conflict as well. When all parties are working towards a similar goal, a system is more efficient, and the parties with less information (in this case, the customers) can be less worried about the presence of moral hazard.

    Froeb, L. M., McCann, B. T., Shor, M. & Ward, M. R. (2016). Managerial economics: A problem solving approach. Boston, MA: Cengage Learning.