Healthcare Economics

Mar 23, 2020 in Economics Essays

Economics Essay Example

In fact, healthcare economics is the field of study that examines the existing problems in the health care system and aims at promoting health of individuals. Such a goal is achieved by the means of analyzing the individual behavior and the work of healthcare providers, both public and private. Moreover, healthcare economics operates such basic terms as fee-for-service, the assignment, capitation, and risk sharing. Actually, managed care organizations became popular in the 1960s and their growth caused intense price competition and a lower rate of increase in individual medical expenditures.

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Healthcare Economics Basic Terms

The basic terms of healthcare economics are fee-for-service, the assignment, the capitation, and risk sharing. Fee-for-service represents financial incentives offered to the physicians. In fee-for-service indemnity plans, the enrollees pay a premium to the insurer and are in charge of a deductible and co-insurance with annual out-of-pocket expenditures. The traditional FFS plan includes a utilization management component. In this case, the insurer reviews the patient’s hospital stay. However, the FFS plans have the highest premiums. The mechanisms that are used to control costs represent patient financial incentives, utilization management, deductibles and co-payments (Feldstein, 2012, p.191).

Another type of financial incentives is capitation. In fact, fee-for-service and capitation differ in nature and, consequently, have a different effect on the medical workers. Fee-for-service presupposes compensation for additional services, while the physicians receive capitation for a flat rate per member per month. Thus, the capitation is a risk-sharing arrangement, which provides contracted services for a predetermined fixed payment (Feldstein, 2012, p.192). Therefore, the physicians have to do more work with fee-for-service than with capitation. The financial incentives also affect the medical workers in a different way. The physicians are less disposed to respond to incentives than medical or non-medical student. The possible reason for such a situation is the fact that the physician cares about his/her reputation most of all. For them, it is necessary to do work professionally, not a great amount of it.

Actually, the assignment is an agreement, according to which the providers accept the fee of a third party payer and is not allowed to charge the patient any extra payment. However, it does not include the appropriate co-payment fees (Feldstein, 2012, p.543).

In fact, the risk sharing agreements are outcomes-based. They involve the reimbursement for medical services. While utilizing the risk sharing agreements, the payers are sure that the quality of the drugs corresponds to their price. However, the risk sharing agreements have a number of flaws in the USA. One of them is an assumption that the best price is a federal one, which is offered by the Medicaid. However, the practice of risk sharing agreements is widely spread in such countries as Italy and Sweden.

Cost Savings Features of Managed Care

The managed care includes many health plans, which often help to diagnose some serious illnesses at an early stage and to treat those illnesses at a lower price in the most effective way. Sometimes, the managed care is offered to the workers by their employer and depends on the care plan they have chosen. The managed care certainly has some cost savings features. First, it pays discounted prices to providers. In fact,  a number of providers would like to have more patients in return for discounting their prices. By entering the contracts with the providers, who are willing to work at discounted prices, the insurers become able to provide the same services at a lower premium (Feldstein, 2012, p.197). Another cost saving feature of the managed care is the fact that it saves patients’ money by providing preventive health care services. Thus, many diseases are treated in a better way, when diagnosed at the early stage of their development.

Managed Care and Patient and Provider Incentives

Many scientists are concerned that the market competition will have a negative effect on the quality of the provided services. However, not-for-profit status in the healthcare system does not mean higher quality of care than  provided by for-profit insurers. The researchers have conducted many studies to get the empirical evidence on the quality of care provided by both not-for-profit and for-profit physicians. The research involves the comparison of the quality on the basis of such diseases as cancer and heart disease, and the mortality and the morbidity outcomes. Overall, the results of the studies suggest that the quality of care provided by both not-for-profit and for-profit providers is similar (Feldstein, 2012, p.202). In fact, HMOs had a worse performance among the elderly and chronically ill patients. However, HMO plans are better in providing preventive care.

Actually, the problem with the managed care is the fact that the providers are not sufficiently rewarded for the high-quality services. The providers do not adopt medical advances quickly. Thus, the consumers are unaware of the providers, who suply a care of  higher quality. One more problem is connected to the fact that the providers are rewarded more for providing special services than for all the others. The tax-exempt employer of health insurance negatively affects the employee’s incentives as such a fact lessens them to ensure the health plans that are more cost-effective.

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Managed Care Types of Plans

In fact, there are four types of plans of the managed care organizations: Health Maintenance Organizations (HMOs), Preferred Providers Organizations (PPOs), Point of Service (POS) plans, and Consumer Directed Health plans (CDHPs). 

In the 1960s, HMOs became very popular among the employees. HMOs received an annual payment per employee in return for all of the medical care of the employees. Actually, the use of the utilization management technique made it possible for them to reduce the use of the hospital. Today, HMO is the most restrictive plan of the managed care. However, HMOs were based on the staff model earlier. Therefore, they either employed or contracted the physicians. Thus, HMOs had their own physicians and hospitals. Moreover, HMOs provided low co-payments and preventive services. The physicians received the salaries and the bonus at the end of the year. As a matter of fact, such a staff model existed till the 1980s (Feldstein, 2012, p.192). In fact, HMOs of the non-staff model entered into the contracts either with independent groups or with physicians. According to this model, the providers are paid the discounted fee-for-service (FFS), fixed prices, the negotiated rates or capitation.

Until 1975, the antitrust laws were applied in the healthcare industry (Feldstein, 2012, p.543). In fact, they enabled the competition among the HMOs and the preferred provider organizations (PPOs). The professional associations are not anti-compatible; they provide the information about the quality of the healthcare providers and do not limit the choice of the provider. Thus, the consumer has the information, which will help him/her to choose a provider. The PPO providers are paid by FFS. The providers’ selection depends on whether they agree to provide care at discount prices. If a provider is chosen as a proffered one, then his deductible is lower than that of other providers that is referred to as the co-insurance rates. Moreover, it should be stressed that not all the insurers have PPO networks. However, they may hire a provider from another organization, which has created the network.

A Point of Service (POS) plan provides the enrollee with an opportunity to see a non-HMO provider and this service should be paid for additionally. In fact, this characteristic is the only difference between the HMOs and POS plans. The advantage of this plan is the fact that the patient is not locked into the HMO. Actually, the POS plans are rather popular among the patients. However, the use of this option is low because of the high costs.

The consumer-directed health plans (CDHPs) enable the patients to control the costs of healthcare and the health benefits. Individuals with CDHPs have full coverage for preventive care and are free to manage health care dollars in the way they wish. After reaching the designated amount, the health expenses are considerably higher. The advantage of CDHPs is the fact that they provide individuals with a tax-exempt account. Moreover, the individuals with CDHPs can track their health care expenses via the Internet, have easier access to the information on the preventive services, and to the provider quality and group rate pricing.

Competitive Effects of the Expansion of Managed Care

The structure of the healthcare system has already undergone the changes in terms of the implementation of managed care firms in the medical care market. In fact, the HMOs and the managed care firms became dominant insurers. The expansion of the managed care leads to the price competition among the insurers and the providers (Feldstein, 2012, p. 8). What is important, there are both critics and advocates of competition in the healthcare market. The former claim that the healthcare industry has experienced some competition, but it has failed. Actually, the latter respond that the healthcare industry has not experienced competition. The expansion of the managed care will lead to a greater competition, which will produce large savings, in turn.

To conclude, healthcare economics is of great importance in the modern society. In fact, it aims at reducing costs for healthcare services and improving individual' health and quality of the services provided. The managed care represents a very useful and cost-saving tool in the health system. In addition, it provides individuals with preventive services. Another advantage of the managed care is the fact that it pays discounted prices to providers. Actually, there are four main types of plans of the managed care organizations; thus, an individual may choose the one, which fully meets his/her needs. Finally, the most important feature of the managed care is the fact that it can help to diagnose the disease at the early stage in order to save costs for the treatment.

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