Incentives For Cost Control Research Articles

A Framework for the Design of Risk-Adjustment Models in Health care Provider Payment Systems.

Prospective payments for health care providers require adequate risk adjustment (RA) to address systematic variation in patients' health care needs. However, the design of RA for provider payment involves many choices and difficult trade-offs between incentives for risk selection, incentives for cost control, and feasibility. Despite a growing literature, a comprehensive framework of these choices and trade-offs is lacking. This article aims to develop such a framework. Using literature review and expert consultation, we identify key design choices for RA in the context of provider payment and subsequently categorize these choices along two dimensions: (a) the choice of risk adjusters and (b) the choice of payment weights. For each design choice, we provide an overview of options, trade-offs, and key references. By making design choices and associated trade-offs explicit, our framework facilitates customizing RA design to provider payment systems, given the objectives and other characteristics of the context of interest.

High-risk pooling for mitigating risk selection incentives in health insurance markets with sophisticated risk equalization: an application based on health survey information

BackgroundDespite sophisticated risk equalization, insurers in regulated health insurance markets still face incentives to attract healthy people and avoid the chronically ill because of predictable differences in profitability between these groups. The traditional approach to mitigate such incentives for risk selection is to improve the risk-equalization model by adding or refining risk adjusters. However, not all potential risk adjusters are appropriate. One example are risk adjusters based on health survey information. Despite its predictiveness of future healthcare spending, such information is generally considered inappropriate for risk equalization, due to feasibility challenges and a potential lack of representativeness.MethodsWe study the effects of high-risk pooling (HRP) as a strategy for mitigating risk selection incentives in the presence of sophisticated– though imperfect– risk equalization. We simulate a HRP modality in which insurers can ex-ante assign predictably unprofitable individuals to a ‘high risk pool’ using information from a health survey. We evaluate the effect of five alternative pool sizes based on predicted residual spending post risk equalization on insurers’ incentives for risk selection and cost control, and compare this to the situation without HRP.ResultsThe results show that HRP based on health survey information can substantially reduce risk selection incentives. For example, eliminating the undercompensation for the top-1% with the highest predicted residual spending reduces selection incentives against the total group with a chronic disease (60% of the population) by approximately 25%. Overall, the selection incentives gradually decrease with a larger pool size. The largest marginal reduction is found moving from no high-risk pool to HRP for the top 1% individuals with the highest predicted residual spending.ConclusionOur main conclusion is that HRP has the potential to considerably reduce remaining risk selection incentives at the expense of a relatively small reduction of incentives for cost control. The extent to which this can be achieved, however, depends on the design of the high-risk pool.

Improving risk-equalization in Switzerland: Effects of alternative reform proposals on reallocating public subsidies for hospitals

The Swiss healthcare financing system is on the verge of one of its largest reforms. The Swiss parliament is currently debating how to reallocate about 20 % of total health expenditures. Swiss cantons make substantial tax-funded contributions to health expenditures by paying 55 % of hospital inpatient costs. As health insurers are fully responsible for all outpatient costs, the present system may provide unintended incentives to treat patients in inpatient settings. This paper presents and evaluates three alternative reform proposals for the reallocation of the cantonal contribution. Two proposals are currently under consideration in the Swiss parliament, suggesting either partial cost-sharing (20 %) of all healthcare costs or inclusion of cantonal contributions into the risk-equalization fund. A third option is developed in this paper, which proposes using the cantonal funds to pay a share of insurer’s expenses above a high-cost threshold. The high-cost risk-sharing alternative is clearly superior: it mitigates the incentive to discriminate against sicker individuals, improves incentives for cost control, and reduces risk of loss for insurers. The paper adds results from Switzerland to an international literature on the properties of adding high-cost risk sharing to a risk equalization model.

Why do HMOs spend less? Patient selection, physician price sensitivity, and prices

Cost-control incentives have become an important part of the health insurance landscape in the United States. These incentives are the strongest in capitated managed care organizations, especially HMOs, because such organizations are paid a fixed amount regardless of the spending they generate. Using a sample of insurance claims from about 500 plans, I find that in HMOs, spending on anti-cholesterol drugs is 19% lower than in other insurance plans. This spending difference could reflect the strong cost-control incentives generated by capitation, but it could also reflect the selection of healthy, price-sensitive patients into HMOs, or it could simply reflect lower prices. To understand the difference, I estimate a model of physician prescribing and patient refill decisions. Patients in HMOs are nearly twice as sensitive to copays as are other patients, consistent with selection of healthy patients into HMOs. Even after adjusting for this selection, however, HMO physicians remain highly sensitive to drug procurement costs. This high sensitivity explains about a 20% of the spending difference; combined with lower prices, it explains about 25–55% of the difference. I find no evidence that these spending reductions result in fewer patient refills or the prescribing of less effective statins.

The Evolution of Health Insurer Costs in Massachusetts, 2010-12.

We analyze the evolution of health insurer costs in Massachusetts between 2010-2012, paying particular attention to changes in the composition of enrollees. This was a period in which Health Maintenance Organizations (HMOs) increasingly used physician cost control incentives but Preferred Provider Organizations (PPOs) did not. We show that cost growth and its components cannot be understood without accounting for (i) consumers' switching between plans, and (ii) differences in cost characteristics between new entrants and those leaving the market. New entrants are markedly less costly than those leaving (and their costs fall after their entering year), so cost growth of continuous enrollees in a plan is significantly higher than average per-member cost growth. Relatively high-cost HMO members switch to PPOs while low-cost PPO members switch to HMOs, so the impact of cost control incentives on HMO costs is likely different from their impact on market-wide insurer costs.

Value-Based Physician Payment in Oncology: Public and Private Insurer Initiatives.

Policy Points: Public and private insurers are implementing payment mechanisms to improve coordination and reduce the cost of drug, hospital, and ancillary services for cancer patients. Some target unnecessary hospitalization, while others create incentives for prescribing lower‐cost chemotherapies and biologics. Physician payment methods in oncology require a balance between incentives for cost control and incentives for patient access to expensive specialty drugs. None of the initiatives adopt bundled methods out of concern for shifting excessive financial risk onto physicians in the context of rapid pharmaceutical innovation. ContextHigh‐value oncology requires physicians to monitor and coordinate all aspects of care, educate and engage their patients, and adopt cost‐effective drug treatments. However, oncology practices in the United States traditionally have been reimbursed based on the number of office visits performed and through cost‐plus margins from prescription of expensive drugs. Public and private payers now are experimenting with methods of payment that include monthly care management fees, annual bonuses, and incentives for conservative choice among alternative drug regimens.MethodsThis paper uses case study methods to examine oncology payment initiatives at Medicare, Anthem, Aetna, and UnitedHealthcare, the nation's largest public and private health insurance plans.FindingsThe 4 insurers supplement traditional fee‐for‐service payment with payment methods designed to promote coordination of care and conservative use of health care resources. Medicare, Aetna, and UnitedHealthcare reward oncology practices that reduce per‐patient spending, targeting unnecessary patient visits to emergency departments and hospitals. Anthem offers monthly payments to practices that adhere to lower‐cost drug treatment pathways; Aetna increases the percentage markup on low‐cost generic chemotherapies but not on high‐cost biologics; and UnitedHealthcare removes the linkage between physician payment and spending on office‐infused drugs. As a condition for receiving the new payments, each of the initiatives requires participating practices to report and, in some cases, improve performance on quality metrics. None of the initiatives bundles payment for oncology drugs together with payment for other oncology services, out of concern for shifting financial risk onto physicians and creating access barriers for patients.ConclusionsThe emerging “value‐based” methods of oncology payment supplement fee‐for‐service and cost‐based reimbursements with per‐month and per‐episode payments, but none of the payers bundle spending on cancer drugs with payments for other services. Payers recognize that bundled payment could create access barriers for patients and undermine innovation in effective but expensive new pharmaceuticals.

The Evolution of Health Insurer Costs in Massachusetts, 2010-12

We analyze the evolution of health insurer costs in Massachusetts between 2010-2012, paying particular attention to changes in the composition of enrollees. This was a period in which Health Maintenance Organizations (HMOs) increasingly used physician cost control incentives but Preferred Provider Organizations (PPOs) did not. We show that cost growth and its components cannot be understood without accounting for (i) consumers’ switching between plans, and (ii) differences in cost characteristics between new entrants and those leaving the market. New entrants are markedly less costly than those leaving (and their costs fall after their entering year), so cost growth of continuing enrollees in a plan is significantly higher than average per-member cost growth. Relatively high-cost HMO members switch to PPOs while low-cost PPO members switch to HMOs, so the impact of cost control incentives on HMO costs is likely different from their impact on market-wide insurer costs.

Conflicts of interest in nephrology

Since doctors disposed of effective tools to serve their patients, they had to worry about the proper management of available resources and how to deal with the relationship with the industry that provides such resources. In this relation-ship, health professionals may be involved in conflicts of interest that they need to acknowledge and learn how to handle. This article discusses the conflicts of interest in nephrology. Its objectives are to identify those areas where such conflicts could occur; to help to solve them, always considering the best interest of patients; and to help health workers to keep in mind that they have to preserve their autonomy and professional integrity. Conflicts of interest of professionals in the renal area and related scientific societies, with the industry producing equipment, supplies and drugs are reviewed. Dichotomy, payment for referral, self-referral of patients and incentives for cost control are analyzed. Finally, recommendations to help preserve a good practice in nephrology are made.

Tradeoffs in the design of health plan payment systems: Fit, power and balance

In many markets, including the new U.S. Marketplaces, health insurance plans are paid by risk-adjusted capitation, sometimes combined with reinsurance and other payment mechanisms. This paper proposes a framework for evaluating the de facto insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement empirical metrics of fit, power, and balance in a study of Marketplace payment systems. Using data similar to that used to develop the Marketplace risk adjustment scheme, we quantify tradeoffs among the three classes of incentives. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, weakens cost control incentives in practice. A simple reinsurance system scores better on our measures of fit, power and balance than the risk adjustment scheme in use in the Marketplaces.

Why Do HMOs Spend Less? Patient Selection, Cost-Control Incentives, and Prices

Spending on anti-cholesterol drugs is 19% lower in HMOs than in other insurance plans. After estimating a model of physician prescribing and patient refill decisions, I find that about a third of the HMO spending difference is due to incentives of physician in HMOs to prescribe low price drugs, about a third is due to the interaction of incentives and prices, and about a third is due to selection of low spending patients into HMOs. Counterfactuals suggest that giving all physicians the cost-control incentives of HMOs could reduce healthcare spending without hurting patient welfare or health.

Financial incentives: current realities and challenges for physicians.

Managed care has become the dominant delivery system in many areas of the United States. Nearly three fourths of privately insured Americans now receive network-based health care through health maintenance organizations (HMOs), preferred provider organizations (PPOs), and various point-of-service hybrid arrangements.1 Physicians receive over one third of their revenue from managed care, and more than one third of physicians receive some revenue from capitated contracts.2 Of managed care's many features, financial incentives to physicians have received the most attention.3 Particular attention has been focused on HMOs that use risk-based capitation financing. Such financing arrangements encourage prevention and cost-effective practice, but also have the potential to discourage care that may be medically appropriate, especially if the omission of such care is unlikely to lead to other negative consequences (e.g., enrollment turnover because of dissatisfaction, revenue losses associated with malpractice cases). Policy makers are concerned that payment incentives confronting individual physicians under some managed care arrangements may distort physicians' clinical judgment.4 Health maintenance organizations vary in how much they rely on financial incentives for cost control, both alone and in combination with other mechanisms, such as utilization review and prior approval policies or broader organizational design aimed at changing physician orientation. Hillman has characterized the balance between these two approaches as the difference between incentives and rules.5 Despite some variation, virtually all HMOs depend at least in part on financial incentives using techniques like capitation, withheld funds, and bonuses. This article discusses the current use of financial incentives in managed care. It is organized in three parts. The first part is conceptual and includes general assumptions about financial incentives and their role in managed care, a framework to provide context for them, and four key variables to use in defining the form of financial incentives. The second part is empirical and presents findings from a recent national survey of managed care plans to illustrate how incentives are structured in managed care and the organizational context in which they operate. The third part presents the observations of the author, a nonclinician researcher, and highlights key challenges facing the medical community as it decides how to respond to managed care. Effects of financial incentives in managed care will not be discussed. Though there are several review articles on the performance of managed care, studies focused on the effects of different methods of paying physicians in managed care plans are rare.3,6–8 Rapid change in managed care organizations as well as physician involvement in a number of different health plans present substantial barriers to these types of studies. As a result, most studies have not isolated the effects of financial incentives on physician behavior from effects attributable to organizational or individual physician factors.

Steering the Healthcare Ship: Effects of Market Incentives to Control Costs in Selected OECD Countries

A noticeable worldwide trend in the development of health systems is their increasing orientation towards the market and a dwindling influence on the part of the State. The so‐called health market is thus regarded in the same way as a market for vegetables or cars, over which the laws of supply and demand hold sway. The State can therefore maintain its influence through, among other things, behavioural incentives, whose function in market terms corresponds in many ways to that of tax reductions used to attain specific goals. Behaviour incentives are accordingly being used in numerous health systems to influence the behaviour of the market players, especially patients, sickness funds, doctors and pharmaceutical suppliers, through the establishment of financial gains or penalties. Percentage excesses, structures for competition between sickness funds, various kinds of fees for doctors or other behaviour incentives are frequently put in place as an instrument to hold down costs. Are market incentives really suitable, however, for example to influence medical decisions in such a way that costs can be kept under control? In the following article the cost control incentives most frequently encountered in OECD countries are set out and analysed as to their goals and effects.

An examination of winners and losers under Medicareʼs prospective payment system

Through case studies of 10 matched pairs of winner and loser hospitals under the Medicare prospective payment system (PPS), specific characteristics and management actions were identified that are related to strong financial performance. Because other payers are increasingly adopting PPS-like cost control incentives and because managed care is fundamental to the national health care reform debate, the successful strategies identified in this article may be of increasing importance to hospital managers.

Methods for cost analysis, cost recovery, and cost control for a public hospital in a developing country: Victoria Hospital, St. Lucia

AbstractInternational attention has focused in recent years on methods for analysing costs of public hospitals in developing countries, with the goal of reducing the financial burden on governments by enabling improved resource allocation, by identifying areas for cost recovery and cost control, and by developing management systems to facilitate these efforts. A range of methods for cost analysis, cost recovery, and cost control are reviewed in this article, with illustrations of applications of the methods at Victoria Hospital, the national hospital in St. Lucia. Comparisons are made to similar studies in Belize, Lesotho, and the Dominican Republic.Cost‐analysis methods focus on a detailed cost accounting effort which identifies the full financial costs of hospital operations and the unit costs of individual hospital services. Cost‐recovery methods include an analysis of cost‐related and other issues involved in setting fee levels for hospital services, determination of exemptions for certain population groups, and management of fee collection systems. Cost‐control methods include analysing the degree of managerial authority exercised by hospital managers in relation to the central Ministry of Health and other government departments, identifying opportunities and incentives for cost control by individual departments within the hospital, and evaluating methods for involving physicians and other clinical decision‐makers in cost control efforts. A diagnosis‐independent method for utilization review of clinical decisions, the Appropriateness Evaluation Protocol, is pilot‐tested and alternatives, including Diagnosis Related Groups, are discussed. Implementation issues related to long‐term systems development efforts are reviewed.

Universal Access to Health Care

More than 30 million Americans lack health insurance, and millions more are "underinsured." Meanwhile, the cost of health care in the United States is escalating, and some of our care is of questionable value. This article presents a health care reform strategy that addresses these three fundamental problems in the US health care system. The strategy, designed to empower consumers to make cost-conscious health care choices, combines a universal tax credit that enables all Americans to purchase basic health coverage; insurance reforms including pooling and reinsurance mechanisms; requirements that all employers make insurance available to their employees and that all consumers purchase coverage; and efforts to measure and improve the quality and efficiency of health care services. This strategy would help us to achieve universal health insurance coverage, while creating the proper incentives for cost control. In addition, it can be largely internally financed through savings automatically triggered by its implementation.

Choices in Prescription-Drug Benefit Programs: Mail versus Community Pharmacy Services

Pharmaceutical price increases and greater coverage of outpatient prescription medications have stimulated interest in containing drug benefit-program costs. While mail pharmacy services (MPS) may achieve savings through volume purchasing, high usage of generic drugs, and dispensing larger quantities of medication per prescription, efforts are also underway to adapt community-pharmacy-based services to keep costs down in these areas. No controlled studies document a difference in quality between the two types of services. Third-party administrators and benefit managers need to consider factors such as providing information to patients, monitoring drug therapy, dispensing patients' correct medication, and cost-control incentives when assessing MPS's role in prescription drug programs.

Financial incentives for cost control under moral hazard

A distinguishing feature of contracted production is that the contractual terms must be agreed upon before the product exists. If the specified product is the result of an innovative and complex process, uncertainties as to its production cost estimates can be enormous. This renders the traditional cost-plus-fixed-fee and fixed-price contractual arrangements increasingly untenable. An alternative contractual arrangement that is currently gaining greater acceptance is the fixed-price-incentive contract, which may be as simple as a linear cost-sharing formula or as complex as a state-contingent reward penalty structure. The problem from the viewpoint of the contractee (principal) is to identify the optimal incentive structure in order to minimize his expected cost; the incentive affects the contractor (agent) through his risk aversion and his propensity for “moral hazard”, due to the co-insurance effect of cost-sharing incentives. Taking as premise the contractee's risk-neutrality, the problem is formulated as a constrained optimization problem, with the constraint arising from the returns to each of the parties to the contract. It is thereby demonstrated that the currently popular linear incentive mechanism is ineffective from the viewpoint of the contractee before the introduction of the problem of moral hazard. We then show that, the problem can be segregated into independent components of the contractor's risk aversion and his propensity for moral hazard. Having established this, we proceed to examine the incentive form as related to the “monitoring mechanism” instituted by the contractor during the performance of the contract. Acceptance of the conclusions necessitates that the contracting parties can interpret their objective as the maximization of the ratio of their expected profits to target profits, which is demonstrated as being equivalent to the minimization of the certainty equivalent of costs.

The Use of Intensive Care: New Research Initiatives and Their Implications for National Health Policy

national wealth going for medical care, discussion is growing about whether and how to stop or at least slow the growth of expenditures. Previous analyses identified many potential culprits: unrealistically high public expectations of medicine; the rapid introduction of new, large capital-cost technologies and surgical procedures (National Center for Health Care Technology, Technology Assessment Forum 1981; Abrams and McNeil 1978); the increasing use of small technologies such as laboratory tests (Scitovsky 1979); a medical-legal atmosphere prone to litigation; the lack of cost-control incentives in hospital care (Newhouse 1978); and a greater reliance on hospital care as part of the dying process, combined with an aggressive approach to many chronic diseases (Zook and Moore 1980; Schroeder, Showstack, and Roberts 1979). Together, these studies form a strong argument that medical care costs in the United States are too high because American citizens do not benefit from much of the medical care they currently receive. The Zook and Moore (1980) and Schroeder, Showstack, and Roberts (1979) studies highlight how much of our investment in medical care is going to a few patients who frequently do not benefit from these

Statistics for Governmental Regulation

Statistics for Governmental Regulation

Incentive Contracting for National Defense: A Problem of Optimal Risk Sharing

This paper analyzes risk sharing in defense contracting within an insurance framework with moral hazard present. The positive model specifies conditions under which risk sharing between the firm and the government can be expected to occur, and identifies the important exogenous characteristics of the firm that determine the equilibrium set of contract terms. An important public policy implication is derived from a normative comparison between the simple incentive structure currently used in defense contracting and a modified contingent claims arrangement. The latter is shown to be superior in providing desirable risk sharing, while also maintaining appropriate marginal incentives for cost control. 1. Introduction * Contracting for national defense has accounted for over half of the total annual defense budget since the early 1960s. The goods supplied by private industry to satisfy the public demand for national defense are generally characterized by an advanced technology fraught with uncertainty, prone to rapid obsolescence, and having extremely large capital requirements. Furthermore, the demand for these goods fluctuates markedly, and is determined by a single buyer, the federal government. These characteristics tend to preclude the development of traditionally conceived markets, and have given rise to an alternative-the bilateral procurement contract. This contractual arrangement stipulates the terms of exchange between the government and a private firm, and also serves as a mechanism for risk sharing between the two parties. The procurement of major weapons systems and their component parts takes place almost exclusively through bilaterally negotiated contracts, rather than through a competitive bidding mechanism (which is generally used only for the procurement of ready-made items). Furthermore, the competition that does exist between firms vying for major defense contracts is principally along the lines of technical design, with true cost considerations playing a relatively minor role in contract awards. The lack of significant price competition creates a strong potential for monopoly profits to be earned in