Economic Policy & Analysis

Week Two – Case Study:

CEO of an HMO

1) A proposal to put a cap on physician compensation. Some members of Congress feel that health care expenses are rising because doctors are overpaid. They propose to limit physician salaries at HMO’s and hospitals receiving Medicare and Medicaid insurance payments to a national standard for each specialty.

Although some people feel doctors are overpaid, what is the reality? Pay is set by the market. Specialized doctors are paid more on average because there are fewer people who are knowledgeable in these specific areas. General practice doctors get a lower wage in comparison because they have more competition. The market for doctors (and the services they provide) is, in general, near the competitive market equilibrium point (McKenzie & Lee, p66). Doctors do get paid more than other professions, but they also have different requirements; more school, higher tuition, higher insurance costs, higher risk/stress activities, etc.

By putting a ceiling on physician compensation will result in a shortage of doctors willing to perform their services (McKenzie & Lee, p64). The market for the services provided to Medicare and Medicaid insured patients, will become backlogged. There will be many more patients needing service than doctors willing to provide the service. Limiting their pay will also decrease the earnings potential for people who are considering a career as a doctor. The costs associated with becoming a physician will shift the supply of new doctors to a lower level and may increase the shortage of doctors throughout the industry. This shortage will, in the long term, increase the compensation of all remaining doctors whether they are supporting the Medicare, Medicaid or private insured patients. This increase in wage will increase the cost of health care expenses; opposite of the desired effect.

We must ask what is the true reason for the increasing health care costs. According to Weelan, the reasons include: “Nobody shops for value..., Medical innovations are usually more expensive, not less...,We don't pay for what we consume..., the Uninsured... and Malpractice...”. These arguments agree with most of the literature that I ran across and not one of the top reasons mentioned in my research indicated the overpayment of doctors as a contributor to rising health care costs.

2) A proposal to subsidize the training of nurse practitioners and physician assistants to increase the supply of these para-professionals. This program would also mandate that hospitals and HMO’s utilize more of these staff to perform routine procedures not requiring an MD, such as physicals, treatments of common, non-life-threatening ailments, etc.

By subsidizing the training of nurses and physicians assistants, we would effectively reduce the cost or barriers to the training. This would allow the cost benefit analysis for those evaluating their future careers, to be weighted more toward the benefit side for more people. Because the benefits of the education would outweigh the cost, the supply would increase. Further mandating what jobs were accomplished by the new additional supply of nurses, would free up some of the less value added tasks of doctors. The physicians would be able to give more of their time to the non-routine, critical tasks. This would effectively reduce the demand on the time of doctors and would reduce the cost of doctors performing their services.

We must also look at the cost of subsidizing the education of these “para-professionals”. At Oregon Health & Science University, the average tuition each year for the nursing program is $12,000. For a bachelors degree it will take 4 years to complete and upon completion students average $28,000 of debt (OHSU). When subsidizing we must also consider that some students who received subsidies will not finish their education. This reduces the benefit associated with subsidies. A comparison of cost and benefit should be weighed so that the system as a whole can benefit (McKenzie & Lee, p105).

To fully understand the costs further study would be required of both the potential long term impact of subsidies and how long the subsidies should remain active. It is possible that by reducing the cost of becoming a nurse we would also reduce the benefit of becoming a doctor and end up with a shortage of doctors. This plan does not make any suggestion of supplementing physicians education. However, it will give the same benefit by freeing up the time of the current doctors and in effect increasing the supply.

3) A proposal to give the poor a voucher grant each year sufficient to purchase basic health insurance for each member of their family. The voucher would amount to $200 per month per person in the low-income family which could only be redeemed for health insurance coverage. This voucher would only be available to those living below the official poverty line.

This health care voucher would cause the cost to some low income individuals to be zero. It would effectively increase the demand for health care. As demand increases, cost decrease when the market is competitive. Since the voucher will be used by each person to select an insurance provider, competition will be increased. With the voucher model the insurance companies will face a lower risk collecting money than from non-sponsored customers. Additionally one of the top reasons for increasing health care cost are the uninsured (Wheelan). By reducing the risk of uninsured people to the system overall costs will also be reduced.

What is the cost to the country and is the line drawn in the best place? What happens to those who are just over the poverty line? This will become a disincentive to those people who are earning near the poverty line. Consider a family earning $1000 over the official poverty line. For a four person family the vouchers may represent $9600 dollars of extra spendable income. Now because this family makes an extra $0.50 each hour worked (assuming 40hrs each week for one person) they will effectively loose $8600. So there is an incentive to work less or find a lower paying job (McKenzie & Lee, p109). There needs to be a mechanism to address this issue to prevent the cost from ballooning and to encourage people to continue to be as productive as possible.

The groups most benefiting from this voucher system will be the most poor Americans, while the middle earners take the biggest hit as demonstrated above. Middle and higher wage earners will benefit slightly because of the increased demand and resulting lower cost. This method may be used as long as it is accompanied by effective mechanisms to control disincentive and other abuse.

McKenzie and Lee (2006). Microeconomics for MBA's: the economic way of thinking for managers. New York: Cambridge University Press.

Wheelan, Ph.D. (2006). The Naked Economist. The Top 10 Reasons for Soaring Health-Care Costs. Retrieved March 1, 2008 form: http://www.nonprofithealthcare.org/documentView.asp?docID=340

Oregon Health & Sciences University (OHSU). OHSU School of Nursing, Retrieved March 1, 2008 from: http://www.ohsu.edu/ohsuedu/about/foundation/schools_nursing.cfm