Health Care Reform and Incentive for Physician Practice

In recent years the integration of insurance companies and health service delivery organizations has led to radical change in the health care market. The attempt by these organizations to lower costs of health care by redistributing risk throughout the demand of the market has led to considerable changes for the suppliers in this markets, the physicians.To understand the dynamics of this affect on physicians, we must, first, understand the specifics of exactly what types of reform have taken place. The emergence of Health Maintenance Organizations, HMO’s, has led to a major part of the reform in the health care market.These organizations serve to provide patients(health care consumers) with health care insurance and the service of medical care. In these types of organizations physicians are considered employees of the HMO, and are paid by a borne plan.

This is to say that for each patient cared for, a physician receives a fixed quantity of money. This is dramatically different from the traditional fee-for-service (FFS) plan where physicians receive payment based on the amount and difficulty of work performed on a given patient(Folland, 93.). From these statements about managed care and traditional health care, we can see the bodywork for a disincentive for a physician to supply labor under an HMO type situation.

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Thro! ugh an expectation of a salary decrease, a quota to treat more patients in the same amount of time used in traditional care, and an increased possibility of legal suits correlated to the way in which health care is administered in a managed care model, we can see a major disincentive for upcoming physicians to work.The changing of a price model in modern health care has considerably lowered expected earnings of practicing physicians. Those physicians that participate in HMO’s receive a flat rate on each patient treated. This is to say that an HMO participating physician treating a patient that obtains services from the same HMO receives a fixed amount, say $F, no matter the service administered. This is formally referred to as capitation(Goldstein, 221. ). This in turn creates an incentive for the physician to hurry his/her care to the patient in order to maximize his/her revenue.

In this type of model, where a physician wants to maximize revenue, we are assuming that a physician is willing to give inadequate care or hurried care in order to maximize revenue. In order to understand the theory of a lowered expected salary we must hold many variables constant, one of which is the quality of care given. Ceterus paribus, treating a fixed amount of patients with a fixed quality of care! , a physician can expect to earn much more in a fee-for-service model than a capitation model offered by current HMO’s(Goldstein, 152. ).In this case it is clear that reform in health care can lead to a salary decrease for physicians. The flat rate paid to physicians by HMO’s have been empirically determined to be far less than a fee-for-service paid to the physician by a patient(Miller, 301.

). The ability to lower a price of fee-for-service to a price of managed care is possible only through the HMO’s exertion of market power on suppliers (physicians). In an unconstrained world, physicians should be able to logically determine that remaining independent, and charging a fee-for-service is more profitable.But through this exertion of market power, HMO’s are able to obtain groups of physicians willing to work for them. This market power is established because patients, by choice, are choosing, more often than not, to be members of HMO’s: both because of an expectation of! decreased expenditures on health care and an easier attainment of quality health care.

So through the use of market power, more and more consumers(patients) are participating members of HMO’s. This makes it the case that physicians that are independent, and not part of HMO’s have a decreasing demand for their labor.Physicians, because of this fact, are more likely to be participating members of HMO’s in order to keep their business(practice) alive; that is to attract a sufficient number of patients where their total revenues are greater than their total costs. This is exactly the case why more and more physicians cannot simply decide to have a fee-for-service practice; and is also why entering physicians can expect to see lower earnings.

It has now been established that with the emergence of managed care comes along an expectation of a lower salary.It has not, however, been established that this will affect the labor force participation rates of physicians. To model a change in participation rates we must turn to the theory of labor supply. This theory summarizes an individual’s choice to work or enjoy leisure time based on: 1) the wage rate available for the particulars individuals occupation 2) the value the individual places on leisure time compared to income(modeled in a ratio called the reservation wage) 3) the nonlabor income an individual receives independent of working status.Applying the theory of labor supply to managed care is quite straightforward in terms of these three variables. Taking the case of one representative physician who is either considering participating in an HMO or his/her own private practice, we see that neither the reservation wage or the non-labor income changes in eithe! r case. We do see, however, a decrease in the wage rate from the private practice to the HMO.

With one variable decreasing, a graph can be constructed to show the change in the labor force participation rate of the representative physician.This is done by a two dimensional graph with axis of: 1) Income from private practice or HMO 2) hours of work dedicated to the private practice or HMO. On the horizontal axis we will quantify hours of work, which implicitly gives information about hours of leisure. On the vertical axis income will be quantified. It can be derived that the wage rate between HMO’s and private practices are distinguished by linear curves with different slopes.

It can also be derived that the representative physician will have a curve indicative of his/her reservation wage(indifference curve); which, as discussed, will be constant in both an HMO and private practice setting. Assuming that this physician seeks to maximize his happiness(utility), it is the! case that the he/she will choose to work at a point where their indifference curve is tangent to the wage rate line. Graphically this can be shown as follows: We see in this graph that the representative physician has chosen to work under a private practice wage rate, but has decided to not participate given an HMO wage rate.

It is not logical to think that all physicians show this same reservation wage. If this were to be the case, we would see no physicians that were participants in HMO’s. Empirically it has been determined that medical schools in the United States have undergone a decreased demand by eligible students to attend their schools(medjournal, 1. ). This evidence can be explained by the graphical analysis considered above. From this decrease in demand to attend medical schools, an argument can be made that potential physicians show reservations wages that lead to the decision not to participate in the health care market because of HMO’s.Apart from an expected decrease in salaries, HMO’s also constrain the way in which their physicians treat their patients. Many primary care physicians that are members of HMO’s face disincentives for referring patients to more specialized care(primarily to increase profit of the HMO).

Often times physicians have payment withheld for referring patients to hospitals, laboratories, or colleagues who provide excellent service, but who have been excluded from the particular HMO(www. amcity. com, 2. ). This, in effect, is freedom loss for a physician that is a member of a particular HMO.

It can be theorized that this freedom loss may increase a physician’s valuation of leisure time. Referring back to the theory of labor supply, it can be shown that an increase in valuation of leisure time can cause a physician to not participate in the medical field, and choose to spend time on leisurely activities. With an increase in reservation wage, we see a steeper indifference curve. Grap! hically, it is as follows(here we also show the change in wage rate from fee-for-service to capitation as well): In this case the representative physician has chosen not to work in part do to the constraints given by the HMO.Following the lines of the argument that constraints create a disincentive for physicians to supply labor, it is also the case that these constraints can increase the probability of a legal suit. The fact that physicians, that are part of HMO’s, cannot readily refer their patients to specialized services, increases the probability that their patients do not receive the necessary treatment.

Inadequate treatment, assuming patients are generally informed about treatment available, can lead to malpractice legal suits.Theoretically, a physician should be able to quantify the increased probability of a legal suit and multiply it by an average legal suit in a dollar amount; which could then be subtracted from an expected salary to give a new expected salary. Participation in HMO’s can decrease expected salary both directly(by a decrease in wage rate) and indirectly(through a legal suit), and can then lead to a choice of a physician not to supply labor. To prove that managed care has reduced incentives for physician practice we must not only look at disincentives caused by HMO’s, but also incentives to physicians that arise from managed care.It is agreed that the introduction of managed care is a step forward in decreasing national expenditures on health care(Wilkerson, 267. ).

It is also agreed upon that managed care has made the process of patients obtaining medical care more efficient(Wilkerson, 270. ). In the case of physicians, however, managed care has done nothing to make their jobs: 1)more profitable 2)more enjoyable 3) easier to provide quality care(Henderson, 101. ).

With this said, it is the fact that reform in the health care market has reduced the incentive for physician practice.Aside from citing the various disincentives managed care creates for physicians, it is important to understand the implications of managed care’s affect on the labor market. Physicians have already begun to unionize against emerging HMO’s. To preserve wages, to maintain freedom in the workplace, and to maintain job security are the primary goals of physician unions. The Independent Doctors of California, the Association of Independent Physicians in New York, and the Association of American Physicians are considered pioneers of the unions set against managed care(Henderson, 187.).

It is likely that if HMO’s continue to emerge in the health care market, many more unions, similar to the one’s previously listed, will develop. Continued growth of managed care is also likely to decrease the quality of future physicians. With more disincentives for physician practice, medical schools may have to lower their standards of acceptance in order to attract a sufficient amount of fut! ure physicians to supply the national demand for health care. A decrease in quality of physicians would also cause a decrease in quality of health care administered.It is now understood that through the disincentives created by managed care, the supply of physicians is likely to fall.

This decrease in labor supply has many implications, all likely to manifest themselves in both the supply of labor( in the form of unions and quality of physicians), and in the product market for health care(in the form of decreased quality of treatment).Bibliography** Bibliography 1) Henderson, David. 1999. The Perverse Economics of Health Care and How We Can Fix It. Stanford, California.

2) Miller, Kimball & Elaine. 1997.Making Sense of Managed Care. San Francisco: Jossey Bass Publishers. 3) Goldstein, Douglass. 1996. Building and Managing Effective Physician Organizations Under Capitation.

Aspen Publishers. 4) Wilkerson, John. 1997. Competitive Managed Care: the Emerging Health Care System. San Francisco, Jossey Bass Publishers. 5) Folland, Goodman, and Stano. 1997. The Economics of Health and Health Care.

Upper Saddle River, NJ: Prentice Hall. 6) www. medjournal. com. 1997-1999. The Training Market: The Effects of Medical Education on Physician’s Income. 7) www. amcity.

com. 1999. Managed-Care Concerns Afflict some Physicians.