Economist working for a large health insurer.

I. You are an economist working for a large health insurer. The CEO of the health insurer calls you into her office one day and says she concerned about rising health care spending. She says hip and knee replacements are the most common inpatient surgery for elderly adults and can require lengthy recovery and rehabilitation periods. Right now, when one of the enrollees (e.g., one the people who has a health insurance plan through the insurer where you work) has a hip or knee replacement, the health insurer pays the providers involved in these episodes of care — hospitals, physicians, and post-acute care providers — separately. Each provider is paid an administratively-determined fee for the care provided (e.g. the hospital gets one payment, the orthopedic surgeon gets another payment, and the post-acute care providers receive a third payment).
The CEO says she’s heard that this way of paying providers for hip and knee replacements is contributing to wasteful spending. She asks if this is true. a. Explain the payment system currently being used for joint replacement, and why it is contributing to wasteful spending. b. From an economic perspective, is the quantity of joint replacement surgeries provided to your elderly members too high, optimal, or too low, and why? Is the quality of care in joint replacement surgeries too high, optimal, or too low, and why?
2. The CEO is thinking about changing payment for joint replacement surgery to a single payment for patient episode of care that begins with admission to a hospital for a joint replacement procedure and ends 90 days post-discharge. This “bundled payment” (also can be called a “case rate”) is to cover all medical services provided to the patient related to the joint replacement procedure.
a. If the health insurer started paying for joint replacements using bundled payments, how would the quantity and quality of procedures change from your answer above and why? b. What do you expect would be the impact on spending on joint replacement surgeries? c. Are there adverse consequences of paying for joint replacement episodes using bundled payment that you think the CEO should worry about? What are they, and how would you determine whether they were occurring?
3. The CEO then asks your advice about moving towards bundled payment more generally. What types of medical care and cases do you recommend for bundled payment? Can you describe a rule of thumb? Something qualitative like: We should use bundled payment where is large and is small.




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