Traditional fee-for-service Medicare




Part 1. Physician payment (20 points)

In traditional fee-for-service Medicare, physicians are paid on a per-service basis. Payments are based on the “relative value units” of a particular service, reflecting the relative costliness of inputs.


A. How does the mix of services provided by primary care physicians affect their reimbursement relative to specialists? (2 points)


B -Describe the principal-agent problem in fee-for-service payment of physicians and physician-induced demand (also called supplier-induced demand).
-Describe the findings of Baker (2010).
-What does this imply about physician-induced demand? (3 points)


C. – Compare the structure of payment under the Alternative Quality Contract compared to fee-for-service reimbursement.
-How does this change the incentives for the volume of services provided by physicians?
-Are the findings of Song, et al. (2014) consistent with your theoretical prediction? (3 points)


D. What is a potential unintended consequence of “global budgets” such as that in the Alternative Quality Contract? How does the AQC attempt to mitigate this incentive, and was the attempt successful? (3 points)



Part 2. Medicare payment of hospitals and post-acute providers and bundled payment (14 points)

CMS’ Bundled Payments for Care Improvement Initiative (BPCI) defines episodes of care (initiated by hospital stays) and spending targets for traditional Medicare enrollees. Providers continue to be paid on a fee-for-service basis. If total spending exceeds the target, then the “contracting entity” pays Medicare the difference. If total spending is below the target, then Medicare pays the contracting entity the difference.

Consider BPCI Models 2 and 3 (listed in Table 3.1 of MedPAC (2013), pasted below), where a hospital stay initiates each model. For this exercise, consider a hospital as the contracting entity directing care under Model 2 and a skilled nursing facility (SNF) as the contracted entity directing care under Model 3.


Consider two conditions:

Condition 1: analysts believe patients admitted to the hospital for Condition 1 are often unnecessarily discharged to an institutional post-acute care provider (for example, a skilled nursing facility or inpatient rehabilitation facility) where a home health provider could provide care more efficiently and effectively.

Condition 2: analysts believe that institutional post-acute care (such as SNF care) is very often clinically necessary after a hospital discharge for Condition 2. However, there is a high incidence of unnecessary hospital readmissions from post-acute care providers for patients with Condition

2. In addition, analysts believe SNF stays are too long for patients with Condition 2.

A. Separately describe which BPCI model is the best match for Condition 1 and 2. In each case, justify your decision by describing which contracting entity is in a better position to improve the efficiency and effectiveness of care, and explicitly describe the change in payment incentives from traditional Medicare to bundled payment for the contracting entity. (6 points)

B. Explain an unintended consequence of bundled payment and describe a feature of BPCI that may offset this incentive. (2 points)

C. List and describe at least one advantage and one disadvantage to having a longer duration episode covered by the bundled payment. (4 points)

D. The goal of bundled payment is to produce a set of incentives to deliver care that maximizes both quality and efficiency. In the week 5 lecture, we considered alternative theories for the existence and behavior of nonprofit hospitals. Under which theory would you expect the largest change in treatment patterns when payment switches from fee-for-service to bundled payment? Provide support for your answer. (2 points)