A Theory of Prepayment, Managed Care, Deductibles and

Copayments Allen C. Goodman, Wayne State U.

Maia Platt, U. of Detroit – Mercy

Seminar

University of South Florida

March 30, 2012

Managed Care

• Managed Care has largely taken over the non-Medicare market for health care provision, and is making in-roads into Medicare.

• Fee-for-service is essentially moribund in the US. See following chart.

Managed Care Plans

Theory of MCOs?

• There’s been no theory.

• What characterizes MCOs?

• Is the Veterans’ Administration an MCO? (Probably is).

Theory of MC?

• Kaiser Permanente– Vertically integrated– Very little choice– “Managed Care heavy”

• PPOs, POS, etc.– Less heavy handed– More choice– “Managed Care light”

Theory of MC?

• Utilization Review– Prospective– Concurrent– Retrospective– Everyone does it now

Selective Contracting

• Morrisey argues that the ability to exclude some (higher cost, noncompliant) providers allows MCOs to reduce costs.

• Providers give up potentially higher payments per activity for the promise of more clients.

• Contracts are extraordinarily complicated. I can give personal examples.

A “Health Services” Perspective

• We had this diagram in FGS-2 FGS-4.

How good are the information systems?

How well do theycommunicate with each other

Some point to the VAas a prime example of one that works!.

Shortell et al

Stylized Facts

• Economists love stylized facts!– Most Americans get their health care risk

pooling through the workplace (btw, PPACA won’t change that).

– Health insurance (HI) is largely (entirely?) paid for by the worker in the form of reduced wages.

– In many ways at least some portion of HI can be considered as “prepayment” for services.

More Stylized Facts

– Although coinsurance rates are negatively correlated with use,

– Deductibles are as often positively correlated as negatively correlated.

– Consumers most often have access to a few, discrete opportunities. How do they choose among them?

Who Pays – Mkt Analysis

Who Pays – Firm LevelHigh loading costs may force

firms to hire fewer workers, or (with minimum wage) not offer insurance

Some Notation

• Household chooses among options in its health insurance package. The health insurance will essentially pre-pay for well-care, and some expected illness.

• The household also may need additional insurable care with probability w. How do they choose among MCO plans?

• At WSU we have 2 HMOs, 2 PPOs, and 1 FFS plan.

Some Notation

Suppose there are three plans n, where n = i, j, k, withw = probability of needing insurable care

Ei , Ej, Ek = expenditures necessary if care is needed.bi ,bj, bk = coinsurance rate faced by householdRi ,Rj, Rk = deductible faced by householdSi, Sj, Sk = out of plan expenditures

Annual Fees for levels of care

respectively.i j k

i j k

F ,F ,F

v ,v ,v

i k j i kQ = Q , Q > Q ,Q .Without loss of generality

Proposition 1

• Proposition 1: Criterion for choosing among MCOs – “less than or equal.”

• Unless a MCO matches household’s preferences (point A) for prepaid care exactly, with number of visits vA, the household will pick one that provides less care. – A household can purchase additional health care out-

of-plan, but cannot sell surplus care. – With the current individual’s preferences, then, plans i

and k dominate plan j. The insured may or may not choose to purchase additional care out of pocket. For purposes of this exposition, we will assume that Sn = 0, so that the insured uses care level i kv = v

PlanAnnualCost

Visits

Oth

er

Goo

dsMCOi, MCOk MCOj

i kv = v jv

Out of Plan, orDeductible (coinsurance rate = 1)

Pure Risk Premium

Av

A

Proposition 2

• Consumers sort themselves into MCOs based on expected need for insurable care, and on the characteristics of the MCOs as defined by coinsurance rate and deductible.

• For empirical work, across large numbers of MCOs, higher deductibles may very well be related to higher levels of utilization or expenditures rather than lower levels.

• In contrast, higher coinsurance rates, holding deductibles constant, will always, in this model, lead to more utilization and expenditures.

PlanAnnualCost

Visits

Oth

er

Goo

dsMCOi, MCOk MCOj

i kv = v jv

Out of Plan, orDeductible (coinsurance rate = 1)

Rk

Av

bkwEk(bk)Rk

kv i

v

A

B

biwEi(bi)Ri

MCOi, MCOk provide same basiccare. MCOi – higher deductible and lowercoinsurance rateMCOk – lower deductible, lower coinsurance rate.

Proposition 3

• There may be heterogeneous preferences within individual MCOs.

• Suppose that there are only 2 MCOs available, MCOi and MCOj, and there are two households as noted in Figure 3. In these circumstances, both households will prefer MCOi to MCOj. As drawn, however:– a low deductible and a high coinsurance rate will be

preferred by Household 1, – while a higher deductible and a lower coinsurance

rate will be preferred by Household 2.

Proposition 3 – cont.• At the lower deductible Rk and higher

coinsurance rate bk, Household 1, if faced with an insurable event will purchase visits, while Household 2 would purchase visits.

• By inspection, we can see that with a higher deductible Ri and a lower coinsurance rate bi Household 1 will be worse off, whereas Household 2 will purchase visits and be better off.

1+iv

2+iv

2++iv

PlanAnnualCost

Visits

Oth

er

Goo

dsMCOi, MCOk

i kv = v 2iv

A2

U1

U2

A1

A1 and A2 representideal amounts of prepaid care

U1

U2 U2

1iv 2

iv

Observations

• There’s a lot of public finance in this model.

• It suggests yet another reason why MCOs may “under-provide” services – i.e. consumers don’t want to pay for something they might not use.

• Suggests ways to model the willingness to pay for insurance, and the structures of copayments and deductibles.

Other Issues

• Given the taste and income distributions what is the optimal number of MCOs?

• Merging of MCOs?

• Disintegration of one MCO into 2 or more?

Other issues

• Does not model the production from MCOs. In other work, Goodman and Stano (2000) argue that there will be a bias toward MCOs that :– are too small;– offer too little service;– offer service that is too “low tech.”

Questions or Comments?

A

Oth

er G

oods

V is its

R i

b iwE i(b i)

R k

b kwE k (b k )

iv

jvi kv v

MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .

{P lanAnnualC o s t

F igure 1 : C ho o s ing Am o ng M C O s

kv

B

Av

M C O i , M C O k M C O j

A

Oth

er G

oods

V is its

R i

b iwE i(b i)

R k

b kwE k (b k )

iv

jvi kv v

MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .

{P lanAnnualC o s t

F igure 1 : C ho o s ing Am o ng M C O s

kv

B

Av

M C O i , M C O k M C O j

This assumes NO “pure” insuranceagainst risk. If we want to showpure insurance, we have a paralleldownward shift and everything elsefollows as before.

A

Oth

er G

oods

V is its

R i

b iwE i(b i)

R k

b kwE k (b k )

iv

jvi kv v

MCO i and MCO k pro vide s am e bas icpac kage . MCO i has highe r de duc t ibleand lo we r c o ins uranc e rate . It is pre fe rablefo r large r am o unts o f e xpe c te d inc re m e ntal c are .MCO k is pre fe rable fo r s m alle r am o untso f e xpe c te d inc re m e ntal c are .

{P lanAnnualC o s t

F igure 1 : C ho o s ing Am o ng M C O s

kv

B

Av

M C O i , M C O k M C O j

A 2

Oth

er G

oods

V is its

R i

b iwE i(b i)

R k

b kwE k (b k )

jv1 2

i iv v

{P lanAnnualC o s t

F igure 2 : H e te ro ge ne i ty within a M C O

1iv

U 1

U 2

A 1

2iv

U '2 M C O jM C O i

2iv

U ''2

A 1 and A 2 re pre s e ntid e a l am o unts o fpre paid c are .