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Marc Montanaro
Week 1 IDEAL elective assignment
1. What are the four modes of financing health care? Describe each.
1. Out-of-Pocket payments: this is the most basic form of financing
healthcare whereby the patient pays directly for goods and services. It is
the predominant form still used in the 3rd world (i.e. patients present to the
ER, are given a list of recommended treatments, then have to go to a
nearby pharmacy to purchase IV fluids, IV tubing, medications, etc).
2. Individual private insurance: in the mode the patient pays a premium to a
health plan and the health plan then pays the provider for the patient’s
care. This form of financing care is rare in the United States in the
modern era, mainly due to the prohibitive cost of individual plans.
3. Employment Based Private Insurance: under this form a person’s
employer pays a premium to the health plan (usually deducted from the
person’s salary and partially subsidized by the government via tax
deductions), and then the provider is reimbursed by the health plan. This
form of financing grew in the mid 20th century to become the predominant
form of health care financing the US.
4. Government financing: in this form the government pays for healthcare
via tax revenue. An example of this is the National Health Service in
England, the VA healthcare system, or Medicare and Medicaid in the
United States (government funded plans for the elderly and
impoverished/disabled/children, respectively)
2. Describe the two main categories of people without health insurance: the 2 main
categories of people without health insurance are the underinsured and uninsured.
The uninsured include those who chose not to buy insurance (often young healthy
men) and those who can not afford individual private insurance or their employer
does not provide coverage but do not meet the requirements to be covered by the
government funded programs (Medicare/Medicaid). Underinsurance is a broad
term that includes gaps in coverage (either insurance or government financed) for
prescription drugs, long term care, catastrophic illness, and exclusions for preexisting illness. High deductibles and co-pays can also cause a form of
underinsurance whereby a patient defers care/medications/preventative services
due to inability to afford a co-pay or deductible.
3. Explain each mode of physician reimbursement: fee for service, episode of
illness, capitation, and salary. Explain each mode of hospital reimbursement: fee
for service, per diem, episode of illness (diagnosis-related group [DRG]),
capitation, and global budget.
1. Fee-for-service: in this method a physician submits a bill for each
individual service to the patient/insurer/government program. This can be
dangerous because it can financially incentivize the physician to order
unnecessary tests/services.
2. Payment per episode of illness: under this form the payer will pay a lumpsum payment for all services related to an episode of illness, including all
Marc Montanaro
Week 1 IDEAL elective assignment
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pre-op and post-op care. This shifts some of the risk from the payer to the
provide and can provide incentives to the provider for quick discharge and
less follow-up.
Capitation: under capitation a physician or group of physicians is paid a
set amount per patient for which they are responsible. This may
incentivize the physician to care for more patients and to utilize
preventative services and practice more cost-conscious medical care.
Salary: in this form a physician is paid a set amount for their services over
a period of time. It is used in the public sector (i.e. VA) and often in
HMOs. Physicians paid this way have little financial risk, but they can
work longer hours than expected to care for their patients and not be
reimbursed for their extra time.
Fee-for-service for hospital: the hospital bills for each service individually
Per Diem: the hospital as paid a lump sum payment for each day a patient
is hospitalized. The hospital is incentivized to keep patients hospitalized
but limit services and the must conduct utilization review to determine if
the hospitalization is still appropriate
DRG: the hospital is paid a lump sum payment for each episode (only the
inpatient portion) of illness. The level of payment is based on the DRG
which tries to factor in severity of illness.
Capitation: the hospital receives a lump sum payment per patient they are
responsible for. This form is essentially not used anymore. It transfers
almost all the financial risk for admissions, LOS, etc. to the hospital.
Global budget: a hospital receives one payment to cover all their services
over a 1 year period and it is up to the hospital to stay within this fixed
budget. This is used in the VA and some Kaiser hospitals.
4. How does capitation payment free insurers of risk? How does capitation payment
shift risk to providers of care?
1. Capitation shifts some of the financial risk from the insurer to the
providers because with a lump sum payment per patient the provider is at
risk if they order expensive testing, referrals to specialists as this comes
out of their budget and they are thus incentivized to care for a large
number of patients but restrict diagnostic testing and specialist referral.
5. Discuss the pros and cons of requiring everyone to enter the health care system
through a "gatekeeper" health care provider (generalist physician, nurse
practitioner, or physician assistant).
1. The “gatekeeper” health care provider has many positives and negatives.
One main positive is that a generalist physician can care for the majority
of patients at a lower cost than if the patient simply went to a specialist for
a primary care issue. Thus restricting access to specialist care to when it is
needed is more cost effective. This system can also incentivize the use of
preventative services as keeping a population healthy will keep costs
lower. One major negative is that a physician will be more likely to try to
avoid specialist referral/diagnostic testing which may be appropriate
Marc Montanaro
Week 1 IDEAL elective assignment
because they receive a larger bonus when there is money left over in the
pool to cover specialist care/diagnostic test. Additionally, one common
complaint is long waiting lists or long delays in obtaining specialist care.
6. What is the difference between an HMO and a preferred provider organization?
In a PPO insurers contract with limited number of hospitals and physicians to care
for their patients. In an HMO a patient is required to receive their care from
providers in that HMO.
7. Give examples of medical interventions that lie on the steeper portions of the
cost-benefit curve, and interventions that lie on the flatter portions. Is the
elimination of the latter painful or painless cost control?
-Steeper: sanitation, oral rehydration, immunizations, preventative care
-Flatter: MRIs, cosmetic surgery, palliative chemotherapy (little mortality
benefit, high cost)
-Elimination of services on the flatter portion is painful cost control as
there is a small detriment to health outcomes in order to achieve lower
costs