Economics And Financing Of Health And Health Care (GW4567M)
Class notes
Summary Lectures Economics and Financing ()
29 views 1 purchase
Course
Economics And Financing Of Health And Health Care (GW4567M)
Institution
Erasmus Universiteit Rotterdam (EUR)
Book
The Economics of Health and Health Care
Lecture notes study book The Economics of Health and Health Care of Sherman Folland, Allen Charles Goodman - ISBN: 9781351595209, Edition: 8, Year of publication: - (-)
Afterwards you are able to:
1. Explain the relevance and analyze the limits of provider payment incentives
2. Explain the relevance of agency theory and interpret models of physician behavior
3. Explain the concept of ‘base payment’ and its rationale
4. Interpret and apply the concept of ‘financial risk’ in relation to provider payment
5. Analyze base-payment methods and interpret empirical research on their effects
Topic 5: Provider payment incentives
Goal 1: Relevance and analyze the limits of provider payment incentives.
What is a financial incentive:
- this is a stimulus that motivates an individual or an organization to perform a specific
action. When this action takes the form of a material reward, for example money,
then it is called a financial incentive.
What is a provider payment system?
- Jegers (2002) : the way in which money is allocated to providers by payers. This
provider can be an individual like a GP, but also an organization like a hospital,
nursing home.
1
, - Important distinction between payment for the provider’s:
o Operational costs ➔ hiring staff materials and so on.
o Physician’s Labor costs ➔ working.
o For the individual practitioners: these two are often integrated.
o For organizations: these two are sometimes split ➔ can result in conflicting
incentives for the individual physician and the organization that they work in.
Relevance of payment systems:
- Financial incentives are always present, in any sector in the economy ➔providers
must somehow be compensated for the work they are doing, so financial incentives
are always present in organizations. In this respect, health care does not really differ
from other kinds of sectors.
- Providers respond to financial incentives and can influence demand ➔ they react to
financial incentives, and also changes in financial incentives. They are able to
influence demand due to their information surplus relative to the patient and the
payer.
- Providers don’t always act as perfect agents for their patients, ➔ they are not only
able but also willing to influence demand if that benefits them
Key question: how to design payment incentives to stimulate optimal provider performance?
Given that some payment method has to be designed and given the providers the ability and
willingness to influence demand.
Blended payment: Robinson
- There are different forms of provider payment systems and all have disadvantages
especially when applied in isolation. So it makes sense to combine methods with
opposite incentives. And in theory: the blended payment will outperform the
methods isolated in their pure form.
The limits of payment incentives:
- Theoretically optimal (blended) payment mechanisms still have important pitfalls
and only tend to soften rather than fully eliminate incentives for
overtreatment/undertreatment and other socially undesirable behaviors. Moreover
the design of the payment incentives creates its own difficulties: complexity.
- In practice we observe a :
o Preference for as-simple-as possible payment mechanisms,
o Reliance on complementary nonfinancial mechanisms. ➔The limits of the
payment systems also explain the importance for non-financial methods for
motivating appropriate behavior, for example: screening and selection,
monitoring, norms protocols and clinical guidelines.
- Important implication = payment incentives do not stand on their own, but they are
embedded in and influenced by non financial schemes and organizational structures.
Goal 2: explain the relevance of agency theory and interpret models of physical behavior.
2
,Agency theory:
- Provider payment entails a form of an incentive contract between provider and
payer. Hence, analysis thereof falls within a larger economic literature on incentive
contracting, called agency theory.
o Entails an incentive contract: payer wants to enforce if needed that he
actually receives what he is paying for: performing the agreed upon task.
o Most widely used theory for analysis and interpretation of provider payment
incentives is agency theory --> about the workings of incentives in contracts.
o Focus on two unequally informed parties: the provider (agent) and the payer
(principal)➔ Well informed agent is given the task to perform on behalf of
the principle. It is assumed that the behavior of both parties is driven by their
own interests and the principle can use incentives to induce desired behavior
by the agent.
Agency theory:
- Information asymmetry is problematic if interests conflict. The agent will exploit his
information surplus which may result in agency problems.
- To what extent are the interests of the providers’ aligned with the interests of
payers? --> to answer that you need to know what determines the utility of
doctors/providers --> utility function of doctors:
Physicians utility function:
- Standard theory of provider behavior: providers tend to strive for profit maximization
or favorable combination of income and leisure.
- This seems not fully applicable providers because they do not exploit all their
possibilities to induce demand. Two explanations:
o Physicians pursue a target income = they do not maximize their income, but
they pursue a target income. They only induce demand until they reach their
target income.
o Physicians’ professional ethics ➔ they are taught during medical school and
they are also imposed to them by their professional medical associations.
The physician’s utility function
McGuire & Pauly’s model of physician behavior:
U = u (I, L, SID), with I = m Q(SID)
- Utility is determined by three things. I = income, L = leisure time, and SID = supplier
induced demand.
- In turn income is depended on the quantity of service provided. Q, which is
influenced by the degree of demand inducement (SID), and also by the average
margin per service (m).
• Assumption: professional ethics play a role in maximizing utility :
o I and L: positive effect on utility
o Degree of SID: negative effect on utility --> because it is valued negative by
professionals due to their ethics.
o And as a result doctors make a tradeoff between I and L and SID.
Article of Rizzo and Zeckhauser:
3
, - Extended the model of McGuire and Pauly.
- Key contribution with this paper lies in incorporating elements of the prospect theory
to demand: which is the importance of reference points and loss aversion in human
decision making.
Rizzo & Zeckhauser’s model of physician behavior:
U = v (I, L, SID) + z (I – R), with R = reference-income
- V = identical to the model of McGuire and Pauly.
- Second part is new: if the actual income is below the reference or target income, R,
this has a negative impact on utility, increasing the likelihood of doctors trying to
increase their income, for example through SID.
- But if the actual income I is above R, the target income, Z will be positive, as apposed
to negative.
- The point is: because people dislike losing more than winning the same amount,
which is the notion of loss aversion, having an income below their reference or target
income, will induce a stronger response as compared to an income that is already
above their reference income.
- In other words: doctors with income below their reference point will have stronger
incentives to increase their income than doctors with incomes above their target
incomes. This is so because the marginal utility of income is assumed to be lower,
above the target income.
• Prospect theory: people have a strong aversion to losing relative to a subjectively
determined reference/target-income
o Below TI: high marginal utility of income
o Above TI: low marginal utility of income
- Empirical evidence for Rizzo and Zechhauser 2003: the TI-hypotheses.
Conclusion
• Physicians do not always act as perfect agents for their patients, but sometimes
pursue their own interests --> this is also supported by studies that shown SID in
practice.
• The good news: altruistic/ethical considerations do play a role --> doctors only seem
to be prepared only to induce demand under certain conditions.
• Yet it’s clear that physicians’ interests will often not be fully aligned with those of
payers → agency problems (when there is unequal information knowledge there
may be agency problems arising).
Dealing with agency problems
• Agency problems can be mitigated by reducing information asymmetry and/or by
aligning interests.
• Given that providers respond to incentives and must be compensated somehow,
payment incentives ideally contribute to aligning interests (see part a)
Goal 3: Explain the concept of ‘base payment’ and its rationale
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ManonEijk. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.05. You're not tied to anything after your purchase.
