Health Economics. University of Linz & Physicians. Gerald J. Pruckner. Lecture Notes, Summer Term Gerald J. Pruckner Physicians 1 / 22

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1 Health Economics Physicians University of Linz & Gerald J. Pruckner Lecture Notes, Summer Term 2009 Gerald J. Pruckner Physicians 1 / 22

2 Physicians in Austria Gerald J. Pruckner Physicians 2 / 22

3 Resident doctors by gender in 2005 per 100,000 inhabitants Source: Österreichische Ärztekammer Gerald J. Pruckner Physicians 3 / 22

4 General practitioners in selected OECD countries (2005) per 100,000 inhabitants Source: OECD Health Data Gerald J. Pruckner Physicians 4 / 22

5 Payment of physicians I The contracts between physicians and public health insurance companies are based on a contract between the Hauptverband der Sozialversicherungsträger and the medical associations on state level. Additionally physicians and insurer agree on an individual contract. There are two possibilities of payment: Flat-rate fee Payment for individual service (fee for service) Both types are mixed in practice. Gerald J. Pruckner Physicians 5 / 22

Additionally physicians and insurer agree on an individual contract.

6 Payment of physicians II Source: BMGF, OÖGKK, WGKK, Statistik Austria Life expectancy Source: Statistik Austria Gerald J. Pruckner Physicians 6 / 22

7 Physicians and their role in the health system Physicians play a major role in health care supply. The physician largely controls and directs medical inputs as an agent for the patient and thereby influences quantity, quality, and cost of the health care system. The physician as the gate-keeper to the health system The double role of physicians: the counselor of patients with respect to treatments... the provider of health care services Is the physician the perfect agent? How relevant is supplier-induced demand? What does utility maximizing physicians mean? Financial compensation can be expected to be important! Gerald J. Pruckner Physicians 7 / 22

The physician as the gate-keeper to the health system The double role of physicians: the counselor of patients with respect to treatments.

8 Increase in health care supply The profession physician seems to be very popular among young people. Medical graduates per 100,000 inhabitants Source: OECD Health Data Cross section comparisons between regions show that an increased supply of physicians is accompanied by a higher utilization of health care services per capita. This result would not came as a surprise (see next figure). Gerald J. Pruckner Physicians 8 / 22

regions show that an increased supply of physicians is accompanied by a higher utilization of health care

9 Market equilibrium the normal case I Gerald J. Pruckner Physicians 9 / 22

10 Market equilibrium the normal case II A downward shift of the supply curve: decrease in price and increase in quantity. Empirical evidence does, however, not confirm a decrease in fees. A positive correlation between physician density and per capita service utilization without a decrease in fees was found e.g. in the U.S. (surgeons in surgeries) and in Germany. Gerald J. Pruckner Physicians 10 / 22

A positive correlation between physician density and per capita service utilization without a

11 Supplier-induced demand Incomplete information of patient on her needs Doctor and not patient makes decisions over demand Demand seems to be determined by supply No consequence if doctor is a perfect agent Problem if not: supplier-induced demand Gerald J. Pruckner Physicians 11 / 22

determined by supply No consequence if doctor is a perfect agent

12 Supplier-induced demand Gerald J. Pruckner Physicians 12 / 22

13 A model of physician behavior (Breyer 1984) Utility maximizing doctors A homogenous good health care One other good Price of both goods = 1 a... number of identical physicians t... fraction of doctor s working time (0 t 1) n... number of inhabitants s... inducement (efforts to induce patients to buy more care than medically necessary) Individual utilization of health care: M = M(s) M s > 0 (1) M... measured in units of doctor s working time Gerald J. Pruckner Physicians 13 / 22

14 The model II The reciprocal of physician density R = n a (2) Demand for one doctor s working time h(r, s) = R M(s) (3) Disposable income (consumption) of physician Y = Y (t) Y t > 0 Y tt < 0 (4) Utility of physician depends on consumption, working time, and inducement u = u(y, t, s) (5) u Y > 0 u t < 0 u s < 0 Inducement is in conflict with professional ethics. Gerald J. Pruckner Physicians 14 / 22

Utility of physician depends on consumption, working time, and inducement u = u(y, t, s) (5) u Y > 0

15 The model III Physician chooses consumption Y, working time t and inducement s to maximize utility under consideration of another constraint: t h(r, s) = R M(s) (6) Effective working time of a doctor cannot be greater than the demand for working time. Assuming equality in (6) yields: f.o.c.: u = u{y [h(r, s)], h(r, s), s} (7) du ds = Y trm s u Y + RM s u t + u s = 0 (8) Y t RM s > 0 RM s > 0 Inducement s is undertaken until the resulting marginal utility of consumption is equal to the marginal disutility of additional working time and of physician s pangs of conscience. Gerald J. Pruckner Physicians 15 / 22

16 Supplier-Induced Demand (SID) Comparative Statics The influence of the physician density R on s in the optimum: ds dr < 0? Theoretically, it is not unambiguously clear that health service per patient would increase with physician density. The result will depend on functional forms of u, M and Y in the above-mentioned model. Gerald J. Pruckner Physicians 16 / 22

Theoretically, it is not unambiguously clear that health service per patient would

17 The Target Income Hypothesis A specific assumption on physicians utility function: Doctor wants to realize a target income Y*. If income falls short Y*, time t and inducement s do no longer play a role. { } > 0 ify < Y u Y (Y, t, s) 0 = 0 ify Y { = 0 ify Y u t (Y, t, s) 0 < 0 ify > Y { = 0 ify Y u s (Y, t, s) 0 < 0 ify > Y } } Gerald J. Pruckner Physicians 17 / 22

If income falls short Y*, time t and inducement s do no longer play a role.

18 Physician density and per capita health service Conclusion The assumption of rational physicians the utility of whom depends on income, working time and demand inducement is not sufficient to stipulate a positive relation between per capita service utilization and physician density. However, this is the case if a doctor has a target income below which only the income motive matters. Gerald J. Pruckner Physicians 18 / 22

positive relation between per capita service utilization and physician density.

19 Annual revenues per physicians in Austria Annual revenues before taxes; fees paid by social health insurance (Gebietskrankenkasse und Sozialversicherung der Bauern) Source: Hauptverband der Sozialversicherungsträger, Daten 2006 Gerald J. Pruckner Physicians 19 / 22

und Sozialversicherung der Bauern) Source: Hauptverband der

20 Other physician issues Small area variations (SAV) are physicians always well-informed (uncertainty and lack of knowledge)? are variations in medical and surgical use rates per capita across (small) geographic areas caused by physicians information problems? welfare losses for patients due to inadequate diffusion of medical information? Wennberg (1990) provides evidence that medical procedures would be considered highly variable. Supply and demand characteristics are important for variation in treatment, however, much variation is left unexplained. Gerald J. Pruckner Physicians 20 / 22

welfare losses for patients due to inadequate diffusion of medical information?

21 Physician Pricing and Price Discrimination I Widespread agreement that physicians have some degree of monopoly power. By raising prices they lose some but not all patients. We apply a monopoly profit-maximizing model to the physician firm (as opposed to monopolistic competition)! Gerald J. Pruckner Physicians 21 / 22

22 Physician Pricing and Price Discrimination II Suppose the physician has chosen to charge fee A. Another customer who is not willing to pay A but A 1: A 1 > MC. Physician can increase profits... as long as the price paid exceeds MC. Outcome-based contracts difficulty of evaluating the health status of the returning patient unobservable patient behavior (did the patient follow the treatment regime faithfully?) Gerald J. Pruckner Physicians 22 / 22

Health Economics. University of Linz & Demand and supply of health insurance. Gerald J. Pruckner. Lecture Notes, Summer Term 2010

Health Economics. University of Linz & Demand and supply of health insurance. Gerald J. Pruckner. Lecture Notes, Summer Term 2010 Health Economics Demand and supply of health insurance University of Linz & Gerald J. Pruckner Lecture Notes, Summer Term 2010 Gerald J. Pruckner Health insurance 1 / 25 Introduction Insurance plays a