Cost Effects of Integrating Diagnosis and Treatment

There is an important inconsistency in Medicare reimbursement policy, and an important general problem in contracting in the presence of asymmetric information.

Anyone who has consulted a doctor, plumber, or an auto mechanic has experienced the tradeoffs in consulting a single expert for both diagnosing and treating a problem. On the one hand, integrated diagnosticians - those who also sell treatments -- may have an incentive to give advice that is not in the buyer's best interests. Theoretically, because the buyer has imperfect information on the scope of the problem (if he did not, he would not have needed to consult a diagnostician in the first place), the diagnostician inevitably has the incentive to recommend treatments that are more profitable, even if they are more costly, lower quality, or less appropriate. On the other hand, joint production of diagnosis and treatment may be more efficient. The diagnostician may have better information about how to treat the problem than he could (or would) provide to an independent third party. Or, the diagnostician may be able to treat the problem himself less expensively or more effectively, under the adage that "half the cost is opening the engine block."

In Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care (NBER Working Paper No. 12623), authors Christopher Afendulis and Daniel Kessler examine an important special case of this problem: the costs and quality of care of a random sample of Medicare beneficiaries with coronary artery disease. They compare patients who were diagnosed by an "integrated" cardiologist -- one who also provides surgical treatment -- to patients who were diagnosed by a non-integrated cardiologist. Given soaring health costs, surprisingly little research has been done to date in this area.

The authors find that diagnosis by an interventional cardiologist leads to increases in health spending of approximately 10 percent, but not to better health outcomes. However, this aggregate effect masks several important, but opposing components. First is the unsurprising moral hazard effect: diagnosis by an interventional cardiologist leads to significantly more angioplasties, the surgical treatment that interventional cardiologists provide. However, because some angioplasty patients used to receive (much more costly) bypass surgery, the extra angioplasties lead to slightly lower health spending overall - approximately $500, or around 2 percent - and to small but statistically significant increases in adverse health outcomes.

The effects due to interventional cardiologists' relative efficiency in managing patients with each type of treatment are more surprising. Interventional cardiologists do not manage angioplasty patients more efficiently; angioplasty patients diagnosed by an interventional cardiologist have higher spending and about the same health outcomes. The big advantage to diagnosis by an interventional cardiologist accrues to patients who are treated with bypass surgery by a cardiac surgeon. These patients have significantly higher health spending and dramatically lower mortality rates. This could be due to interventional cardiologists' sorting patients into bypass surgery or allocating them to cardiac surgeons more effectively.

The big disadvantage to diagnosis by an interventional cardiologist, according to the authors, accrues to patients who are treated non-surgically; these patients have significantly higher mortality. This could be due to interventional cardiologists' lack of ability or incentives to treat non-surgical patients effectively.

The authors' results point out that there is an important inconsistency in Medicare reimbursement policy, and an important general problem in contracting in the presence of asymmetric information. Explicit "kickback" payments from treating to diagnosing doctors are banned by law (for public purchasers such as Medicare and Medicaid) and by contract (for private purchasers like insurance companies and large employers). However, the principle underlying this ban is not generally applied to doctors' decisions to provide integrated diagnosis and treatment, even though integration can have the same effects on incentives and behavior as kickbacks do. In addition, allowing integration but banning kickbacks effectively allows rent capture by integrated but not non-integrated doctors, which can distort treatment decisions even further.

The authors discuss how these incentive problems might be resolved. A blanket ban on the integration of diagnosis and treatment would be completely impractical. Every doctor provides both diagnosis and therapeutic services; interventional cardiologists are only one example. The authors therefore conclude that paying integrated doctors differently, or allowing doctors more freedom to make and receive payments for referrals, could reduce cost and improve quality. For example, their results suggest that interventional cardiologists' important strength may be more in the triaging of surgically treated patients than in the provision of angioplasty. If further research finds this to be true, then paying interventional cardiologists more for diagnosis and less for treatment could help reduce spending and improve outcomes.

The authors' results also suggest that interventional cardiologists' important weakness may be in the management of non-surgical patients. If further research shows this to be true, then paying interventional cardiologists to refer patients to non-interventional cardiologists for non-surgical treatment, or allowing non-interventional cardiologists to pay for referrals, could also improve productivity in health care

-- Les Picker