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Medicare Fee Change Effect on Utilization

By March 4, 2010Commentary

For some time economists have theorized that health care often does not follow traditional demand and supply models and that, in particular, the volume of physician services supplied does not seem to go down when prices are reduced.  A new piece of research looks into this link in regard to Medicare fee changes.  (Inquiry Article) (Abstract Only)  Many observers have noted that Medicare volume appeared to increase when fees stayed flat or were even reduced, and have therefore speculated that physicians were engaging in volume offset behavior.

In this research, the authors construct a complex economic model utilizing Medicare claims linked to physician survey data regarding their practices.  They find that in fact, physician behavior appears to correspond with general economic supply theory.  That is, when profitability falls, services delivered fall and when profitability rises, services supplied rise.  Since physicians control demand much more than in other industries, demand more closely will track supply.  In addition, the presence of third-party payment may desensitize patients to normal impacts of price on demand.

Because this is a model, as opposed to a cause and effect randomized trial for example, some skepticism should be attached to the results.  The authors do suggest that one possibility is that physician costs have fallen as fast or faster than Medicare fees, so that performing more services in fact is just profit-maximizing behavior.  They also find that physicians who are on salary show much less of a tendency to vary volume when Medicare fees are changed.  Putting all physicians on salary, their model suggests, would result in very significant health expenditure reductions.  Overall the research poses some interesting followup questions and provides some potentially useful guidance on how to use Medicare fee changes to encourage use of high-value services and reduce wasteful or inappropriate ones.  It also appears to validate physician delivery of medical care as significantly affected by economic considerations, which physicians often deny.

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