Medicare Reimbursement and Private Plan Payments to Physicians

It has long been assumed that there is a relationship between what Medicare pays to providers and what a private insurer has to pay to the same provider.  Most often it is assumed that low Medicare reimbursements cause cost-shifting to the private health plans.  Research published by the National Bureau of Economics Research examines and attempts to quantify the effect of Medicare rates on commercial ones.   (NBER Paper)   The authors note initially that because Medicare is such a significant payer and because billing for medical services is so complex, the payment methods and amounts used by Medicare could be picked up by private payers.  This certainly seems to be the case, as witnessed by the spread of DRG methodology to private reimbursement and the increasing use of the Medicare physician fee schedule as the starting point for reimbursement for doctors.  While the amount of private payments in general  is higher than Medicare levels, changes in Medicare payments could still be tracked in the private sector.  The authors looked at both a substantial change by Medicare in a specific surgical service and an across-the-board change in physician payments.  The private payments were determined from a large commercial insurer database.   According to their analysis, a $1 decrease in the Medicare payment for the single surgery service led to a $1.30 decrease in private payments. While saying nothing about the absolute level of reimbursement for each type of payer, this result does contradict the cost-shifting theory to some extent.   For the across-the-board Medicare reimbursement change, a $1 decrease led to a $1 decrease in private payments.   In addition, the researchers found that the effect of the Medicare payment changes was strongest in markets with low concentration levels and/or large numbers of providers, suggesting that in relatively non-competitive markets, providers are able to decouple private payments from Medicare ones.  The authors suggest that Medicare’s market power and ability to dictate reimbursement methods and levels may make it difficult for private payers to introduce innovative methods of payment, but that provider concentration may help limit that problem, as powerful providers may be more willing to consider value-oriented payment systems.  Not sure about that logic!  The paper gives an interesting insight into the effect of Medicare on private payer prices.