Transcript Physician Services - Missouri State University

Lecture Notes – Physician Services Market
Why do we have physician
firms? (and what do they do?)
 dual role of physician firms
 the physician as an input into the production of
physician services
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Demand for physician services is a derived demand.
Affected by Economic factors
 Prices, Income, insurance coverage, prices of competing goods
Affected by Non-economic factors
 Age, Illness events, education, marriage, etc.
 the physician as owner and entrepreneur
 Supply of Physician Services is derived from other end of
market (input markets) such as:
 Physician Labor, nurses labor, technical assistants, etc.
 Capital and equipment
 the physician services firm vs. the market
 vertical and horizontal integration (what's that?)
 What is the alternative? Compare internal (integration) vs.
external (market) systems.
 Health care has moved away from the market toward internal
system with government regulation.
 possible goals of the physician firm
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profit
leisure (of who?)
patient's health
What are the relationships?
 important issues to be addressed
 demand side or allocative efficiency
 supply side or technological efficiency
 public policy implications
Demand Side Performance
 Overriding issue is allocative efficiency but difficult to
measure either benefits or costs => How to assess allocative
efficiency?
 variations in physicians' fees between areas/physicians
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how should fees vary in a perfectly competitive market?
if patients have incomplete information and must search?
if quality differences exist between physicians?
empirical predictions
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Consider 2 different goods – standardized glaucoma test vs. surgery
for, say, prostate cancer – Which would have the largest variation in
fees even when the market is competitive (but with asymmetric
information)?
Glaucoma test – why? Doesn’t pay to search for the best deal for
small budget item.
 is the market for physicians' services competitive?
empirical results
Variation in Physician Fees
Procedure
Initial office visits
Normal delivery
stress test
prostate surgery
hernia repair
High
53
1450
300
2000
1030
Low
31
775
100
1200
450
Percent
Difference
70.97%
87.10%
200.00%
66.67%
128.89%
Note: all data is from the 1980s
 Conclusions = ? Get large variation even for large
budget items =>
 Evidence that the market is not competitive.
 increases in physicians' fees over time
 what should happen to fees in both short and long-run
if the market is competitive?
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Short-run competitive firms can make profits => prices and
costs may vary independently.
Long-run competitive firms can not make profits => prices
can only vary as costs vary.
 do fee increases over time reflect increased costs?
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Examine handout to answer question – especially look at
differences over time in how fees change compared to costs as
measured by overall CPI.
 Conclusions
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Evidence of lack of competition in market
More evidence of competition in recent past
Supply Side Performance
 the production of physician services
 how do you measure output
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physician visits? - advantages and disadvantages
annual gross billings? - advantages and disadvantages
 what are the inputs in the production process?
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must be at least 1 physician (why?)
other inputs? Nurses, technicians, etc.
relationship between the inputs? Substitutes vs.
complements?
 technological efficiency
 empirical studies of the use of aides by physicians
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Increases in price increase the optimal # of aides
Increases in wages decrease the optimal # of aides
Confirmation of economic theory on optimal use of inputs
However, aides also found to be underutilized => inefficient
(see T 15.1 p. 239). What other inputs are underutilized?
 MP/w should be equal if inputs are correctly utilized
 If MP/w larger for a given input => that input is underutilized
and the reverse.
Why are too few aides and other inputs used?
 Attempt by Dr. to give best possible care (Dr.’s care) to patient?
 How to use a monopolized input (Dr’s) to maximize profit?
 group practice studies
 Group practices produce more at lower costs => efficient.
 Recent increases in the use of group practice suggests efficiency as
well
 Economies of scale exist and explain increasing size of physician
firms.
 Incentive Problems in groups
 Shared profit leads to incentives to shirk. Why?
 As group size increase then incentives to shirk increases.
 If paid flat wage the incentive then still have incentive to shirk.
Why?
 How does the firm monitor worker effort?
 referrals among physicians (why is this a concern?)
 fee splitting
 multi-specialty firms
 Conclusion = increases in competition are forcing drs to take
advantage of aides, economies of scale, etc. => the market is
non-competitive but the level of competition is increasing.
Models of Physician Pricing
 monopoly pricing model (collusive joint profit
maximization model)
 the importance of entry barriers
 cheating on the cartel
 what happens, according to the model, when insurance
coverage increases?
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Demand increases and becomes less elastic.
Both cause price to increase. This prediction is supported by
empirical evidence.
 why limit advertising by physicians?
 Supplier induced demand
 Two conditions lead to SID
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Assymetric Information
Dr. as agent
Based on empirical observation of correlation between things
like:
 Hospital beds and hospital utilization
 Drs and utilization of Drs services
Two possible interpreations using D/S analysis
P
P
S
S
S1
D1
D1
D
D
Q
Q
S increases
D increases
Drs income falls
QS increases
Responds by inducing D
P and Q rise
P and Q rise
 Target income model
 The first graph is this model
 Notice that the second graph is simplier and evidence suggests it is
more likely to explain the empirical observation.
 Price rigidities
 Difficult to change price quickly (why?)
 As input prices rise => prices rise slower
 Leads to inducement but only enough to decrease the surplus
 Disapears over time
 Disutility of discretion model
 Problem with SID = why are drs satisfied with a given target – why
not higher?
 Assume U = U(Y, W, D)
 Y=Drs income, + impact; W = Drs hours of work, - impact
 D=Disutility caused by inducing demand, - impact
 Inducement causes tradeoff between extra income and more work
and disutility from inducement.
 Therefore, a limit to inducement because of tradeoff
 Profit maximization
 SID has another potential tradeoff
 Increasing D increase profit but also increases costs (diminishing
returns).
 Tradeoff between the two leads to some limit to SID
 Problems  identification
 Causality – See figures above
 Graph 1 says increase in S causes increase in D
 Graph 2 says increase in D causes increase in Qs
 Causality asks which comes first
 Empirical Evidence on SID
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Some evidence in favor of SID from price rigidity studies
Is there evidence of SID caused by imperfect information and
agency?
Compare initial visits to Drs (patient initiated) vs followup visits (Dr.
Initiated) => find evidence of SID from differential impact of D.
Some evidence exists of SID although not large impact
 Small Area Variation
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Figure 10.5 p. 216
Shows variation in utilization between geographic areas.
Why?
 Differences in level of competition
 Differences in information/practice styles of Drs.
 Figure 10.6 shows these differences which lead to different
practice styles.
How to test the model? How do we measure practice style?
 Studies show that education/feedback/surveillance of Drs
changes practice style.
 Comparison of relatively homogenous areas still finds SAV.
 Multiple regression studies controlling for other factors still
find SAV (although smaller).
 Public Policy
 conclusions about the level of competition in the
physician services market
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Market is not competitive.
The level of competition is increasing.
 possible public policy proposals to increase
competition
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Regulation
 The source of much of the inefficiency in the market is
regulation (e.g., licensing laws lead to non-optimal use of
labor in health care markets) => reduce regulation?
 Problems
Medicare payment reform
Others?
 The Physician as Labor
 why become a doctor? (what matters when making the
decision?)
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the cost of becoming a doctor
the benefits of becoming a doctor
graphical
$
Earnings MD
Earnings BA/BS
$0
time
Graduate
with BA/BS
Graduate
with MD
Earnings MD
C
$
Earnings BA/BS
B
A
time
 Area A = Direct costs of MD
 Area B = Indirect costs of MD
 Area C = Benefit of MD
 Invest if C > A + B – not quite, also add discount rates
 Empirical Results – see handout on rates of return for MD
education
Why specialize?
 the cost and benefits of specialization
 empirical rates of return
 Why have licensing of health care professionals
 3 theories
 Each focuses on a different group benefiting from licensing.
 Public Interest Theory
 Licensing benefits the public - consumers
 Capture Theory
 Licensing benefits the professionals being licensed.
 Political Economy Theory
 Licensing benefits the regulators => sell licensing to highest bidder,
sometimes public and sometimes professionals.
 Empirical Evidence tends to support political economy theory
 See T 15.4 p. 344 – licensing varies by state => test the impact of licensing on
professional fees => conclude sometimes fees increases but sometimes not.
 Quality – if licensing increases quality => supports public interest.
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Again sometimes find quality increased, sometimes decreased => support for
political economy theory.
 labor supply of physicians
 why do physicians supply labor?
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labor as a consumption good
 Work because it gives us utility => implications?
labor as an investment good
 Work because it gives us money => implications
the relationship between labor and leisure
 Leisure is what you do when you’re not working or
sleeping/eating/etc.
 Tradeoff between labor and leisure
what is the wage rate?
 Wage rate equals the price paid for labor
 Wage rate also equals the opportunity cost of leisure
 what does an individual's supply of labor look like?
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Two effects of a wage increase
 Focus on the labor/leisure tradeoff => when leisure ↑ or ↓
then labor ↓ or ↑.
 substitution effect – w ↑ => consumption of leisure ↓
because leisure is now more costly (↑ opportunity cost of
leisure) => substitute less time intensive types of leisure for
more time intensive types => ↑ quantity supplied of labor.
 income effect – w ↑ => income rises (↑ price of labor) =>
leisure is a normal good => consumption of leisure ↑ =>
↓ quantity supplied of labor.
 Both effects occur simultaneously => which is largest?
 Empirical question – examine behavior as wages
increase
 Empirical studies of physician labor supply shows the
following:
SL
W
Income Effect outweighs
Substitution Effect
Theoretical Maximum =
16x7
Substitution Effect outweighs
Income Effect
112
Hrs/Week
 Do market labor supply curves also bend backwards?
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Empirical questions and answer = no. Why not?
 New entry as w increases.
 Fixed components of labor supply
 One example is malpractice insurance, which induces
drs not to reduce labor supply as wage increases.
 Physician Location Decisions
 Hotelling Model
 Say have a concession stand on a beach:
 Where do you locate? Assume customers evenly distributed on beach.
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Why? Because it reduces travel time and maximizes demand and profit.
 Where does second, third, etc. firm locate?
 Same principle for new entry.
 Also same principle is true for Drs.
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Locate where they can have the maximum number of customers.
 Predictions from the model:
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As the number of drs increases => should see more communities
with drs.
Same is true of specialists.
Empirical evidence supports these predictions.