Physician Agency and Payment Models

Ian McCarthy | Emory University

Fee-for-Service versus Capitated Payments

Fee-for-Service (FFS) payments

  • Separate payment for each service
  • More care means more revenue
  • Example: Traditional Medicare

Capitated payments

  • Set amount intended to cover all expenses for a given person/group
  • If expenses exceed that amount, the providers lose money
  • If expenses fall below that amount, the providers make a profit
  • Examples in U.S.: Accountable Care Organizations, Kaiser System

Incentives

Thinking about FFS versus capitated payments…

  • What are the incentives in a FFS model if the goal is to make more money?
  • Are those incentives different in a capitated payment model? How?

Agency and payment models

  • Physician receives fixed (“capitated”) amount for each patient, \(R\), along with some price per unit of service, \(p_{s}\)
  • Physician therefore paid \(R + (p_{s} - c)x\) for each patient
  • Number of patients for each physician expressed as a positive function of the net benefit offered, \(n(NB)\), where \(NB=B(x) - p_{d}x\). Here, we assume that the insurer sets \(p_{d}\) and \(p_{s}\) separately (the demand and supply price, respectively).
  • Physician again aims to maximize profits, \(\pi=n(NB)\left[R+(p_{s}-c)x\right]\).

Solution

  • Maximizing the profit function yields: \[n'(NB)(B'(x) - p_{d}) \left[R + (p_{s} - c)x \right] + n(NB)(p_{s}-c) = 0.\]

  • Rearranging terms and multiplying both sides by \(\frac{1}{NB}\), we get: \[\frac{B'(x) - p_{d}}{NB} \frac{R + (p_{s} - c)x}{p_{s}-c} = - \frac{1}{\varepsilon_{n,NB}}.\]

  1. What happens for \(R=0\)?
  2. What about \(R>0\), assuming \(p_{s}<c\)?

In-class problem: Agency and payment models

  • Assume that the physician’s number of patients in the practice depends on the net benefit offered, \(NB=B(x) - p_{d}x\), where \(x\) denotes the amount of care and \(p_{d}\) denotes the prices that the patient must pay. For simplicity, we’ll assume that the number of patients is the same as the net benefit, \(n(NB) = NB\).
  • Assume that patients are fully insured so that \(p_{d}=0\).
  • Assume that the benefit function is \(B(x) = 16x-2x^{2}\).
  • Assume that the physician is paid a fixed amount, \(R\), for each patient, and earns some profit, \(p_{s}-c\), on each unit of care.
  1. Solve for the patient’s optimal amount of care (if they could choose the amount on their own).
  2. Write out the physician’s profit function based on the information provided.
  3. Find the physician’s optimal \(x\) if \(R=0\) and \(p_{s}-c=1\).
  4. Find the physician’s optimal \(x\) if \(R=1\) and \(p_{s}-c=1\). How does this differ from part (3)?

Takeaways

Excessive treatment may arise because physicians can choose a level of care, and this choice may derive from incentives that are not perfectly aligned with those of the patients. From this section, you should be able to:

  1. Set up and solve the physician’s optimization problem and compare the solution to that of the patient’s optimum.
  2. Show mathematically how the design of an insurance contract (namely, capitated payments versus fee-for-service payments) may determine the extent to which physicians overprovide care.

“Capitation” in practice

Capitated Payments

There are two forms of capitated payments in Medicare now:

  1. Bundled Payments
  2. Accountable Care Organizations

Pay for performance

There are three main pay for performance programs employed in Medicare right now:

  1. Hospital Readmission Reduction Program
  2. Value-based Purchasing
  3. Quality Payment Program for physicians: Merit-based Incentive Payment System (MIPS) and Advanced Alternative Payment Models (APMs)

Physician Agency and Financial Incentives IRL

More general setup

  • Physicians choose \(x\), incorporating their own profit, the benefit to the patient, and some disutility of work \[u(x) = V(\pi) -e(x) + \alpha B(x)\]
  • \(x\) need not be “quantity of care”
  • Agency more reasonably applies to which types of treatment physicians choose rather than “how much”

Evidence on Financial Incentives and Treatment Decisions

Effects of financial incentives on…

The Takeaway: On the margin, financial incentives do affect treatment decisions. Some responses may negatively affect patients, but typically this probably involves more money for similar-quality care.