Agenda

• Medicare

• Dialysis

• Model

Medicare

• Established 1965– President Johnson

• Who’s covered?– 65+ and legal and paid

Medicare taxes for +10 years

– Social Security disability for +2 years

– Social Security disability and ALS

– On dialysis or need kidney transplant

• Part A– Hospital stays +1 night– Skilled nursing facilities (short term)

• Part B:– Most medical care

• Part C: Medicare Advantage– Established 1997. Complicated– 22% of Medicare population– A+B through private providers

• Part D:– Established 2003. Complicated– Private plans that cover drugs

Medicare Insurance

• Premium: $96.40/mo. for Part B– Higher for higher incomes

• Deductibles– $1069 for hospital stays (Part A)– $135 for Part B

• Co-Pays for Part B– 20% for most– 0% for lab work

• Out of pocket expenses can be covered by– Medicaid for poor– Private insurance (Medigap)– Except “donut hole” for drug coverage

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for Part A for Parts B & D

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Medicare Reimbursement

• Fee for service

• Sets rates– Lower than private health insurance– Sometimes using Average Sales Price (ASP)– Does not negotiate drug prices for Part D

• Moving towards “pay for performance”– Paper looks at optimal contract for dialysis

Agenda

• Medicare

• Dialysis

• Model

• Renal = kidney related• Produce urine• Remove toxins from blood• Homeostasis = regulate

– Electrolytes (salts)– pH– Produces renin regulating blood pressure– Absorbs glucose and amio acids– Metabolizes vitamin D into calcitrol (calcium balance)– Erythropoietin (EPO) production

(hormone for red blood cell production)

Kidneys

Kidney Function

• estimated glomerular filtration rate (eGFR)

+90% normal+60% hardly noticeable< 60% Chronic kidney disease (CKD)

30-59% anemia + weak bones≤ 20% causes serious health problems

≤ 10%, 15% End Stage Renal Disease (ESRD)– Need dialysis or transplant (long waitlist)

Chronic Kidney Disease (CKD)

• Chronic = deterioration over time ≠ acute• Most diseases attack both kidneys• 0.2% prevalence• Common causes

– Diabetes

– High blood pressure

• Treatment can slow progression• 10-20 years until ESRD

Dialysis

• Hemodialysis (hemo = blood)– 3x week, 3-4 hr sessions in clinic– Alternatively at home more frequently– Vein in hand/arm– Most common (focus of paper)

• Peritoneal dialysis– Pump fluid into peritoneal cavity– Exchange through peritoneal membrane– Permanent tube in abdomen– 4-5x day, less equipment

• Also inject drugs

What can go wrong?

• Hospitalized ~ 30% of the year• Causes

– Heart problems– Fluid build-up– Infection

• Dosage = Urea Reduction Ratio (URR)– Adequate = +65%

• Anemia = Hematocrit level (red blood count)– Optimal = 33-36%

• Drugs billed separately (40% of revenue)• Lab work billed separately• New rule would bundle them (9/15/2009)

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Stylized Medicare Payments

• $130/session

• When hospitalized– No payment to provider– Costs Medicare $30,600 / year

Evidence-Based Incentive Systemsfor Medicare Dialysis Payments

• Incentives matter

• Optimal contract design

• With data!

• Dialysis is a good example.

Agenda

• Medicare

• Dialysis

• Model

Principal Agent Model

• 2 player game– Principal = Medicare– Agent = Dialysis provider

• Sequential game

1. Principal announces contract

2. Agent takes hidden action e

3. Outcome o(e) observedPrincipal receives E[U(o,-(o))]

Agent receives E[u(e,(o))]

Principal Agent Model

• Agent optimality: e*() in arg maxe E[u(e,(o(e)))]

• Principal optimality:* in arg max E[U(o(e*),-(o(e*)))]

s.t. Agent participation constraint holdsU0 ≤ E[u(e*,(o(e*)))]

1. Principal announces contract

2. Agent takes hidden action e

3. Outcome o(e) observedPrincipal receives E[U(o,-(o))]

Agent receives E[u(e,(o))]

Intermediate and Downstream

• int = Intermediate, ds = downstream (final)• Outcome a vector: o = (oint,ods)• Action a vector: e = (eint,eds)• o(e) = simple function + correlated noise

– oint = eint + int

– ods = oint + ´ds = eint + eds + ds

– noise mean 0 and = Cov (int, ds)

• E[oint] = eint, E[ods] = eint + eds

Simplifications

• Affine contract: (o) = 0+intoint+dsods

• Aligning incentives: oint = E[ods | oint ]• Action/effort has cost g(e) = cTe+0.5 eTQ e

– Increasing costs to effort

• Agent has exponential utility– u(x) = -exp (-r x)– Constant absolute risk aversion– u(e,(o)) = - exp (-r [(o) - g(e)])

• Principal risk neutral– E[U(o,-(o))]= v ods - (o)

Dialysis Application

• Outcomes o = (oint,ods)

– ods = fraction of hospital free days in year

– oint = f(DOSAGE,ANEMIA)DOSAGE = % of treatments URR ≥ 65%ANEMIA = % of treatments hematocrit in [33%,36%]

• Current payment scheme: (o) = current ods

• Reservation utility U0 set by current payment scheme

Risk Adjustment

• Principal able to observe patient characteristics(part of the noise) int int,i + hint(PATi) ds ds,i + hds(PATi)

• Payment scheme is risk adjusted (o) = 0+int (oint-hint(PATi)) +ds (ods- hds(PATi))– Similar to adjustment for case-mix in current

scheme

Parameters

• r unknown, baseline 2·10-5

– paying $10 ~ 50-50 chance of winning/losing $1k

• v = $30,600 / year hospital free

• g(e), , f(DOSAGE,ANEMIA) fit from data– g(e) adjusted R2 = 0.034

Results

• Current payment scheme ds = $27,900/year close to optimal for int = 0

• Optimal scheme: (o) = $27,700oint+ $400 ods

$2,140 increase in Medicare payments to provider+27 hospital free days$123 savings for MedicareReward (and risk) increased for provider

• 266k Medicare patients on dialysis+20k hospital-free life years, $32M savings

Sensitivity

• Higher risk aversion leads to small 0

• Diminishing returns for increasing v