Medicaid/Medicare Physician Compensation

A Tale of Two Bounties: Can Physicians Cost Shift from Medicare to Private-Pay Patients

Do physicians cost shift after Medicare reduces reimbursement rates?  A paper by Rice et al. (1999) examines whether or not this in fact occurred after Medicare reduced payment for surgical procedures in the late 1980s.  To be more specific, “The Omnibus Budget Reconciliation Act of 1989 (OBRA-89) reduced Medicare physician payment rates for thirty-six groups of so-called overvalued procedures, covering 245 individual procedure codes.” The study examines the impact of these changes using data from 1988-1991 covering the frequency of 17 major surgical procedures in 182 hospitals.  The data on privately insured individuals was obtained from the Commission on Professional and Hospital Activities (CPHA) a convenience sample of 3.7% of U.S. hospitals.

To control for omitted variable bias, the authors used a fixed effects specification.  This framework averages the effect of changes in Medicare reimbursement on quantities within each hospital.  Thus, it can control for time-invariant hospitals characteristics, but it cannot control for unobserved hospital characteristics which vary over time.

In the study period, “privately insured patients brought in far more revenue per hysterectomy than did Medicare patients: $1,538 versus $885, a ratio of 1.74…Typically, Medicare paid 60 to 70 percent as much as private insurers before the reductions in Medicare payments.”

Using this data and the empirical framework outlined above, the authors find that Medicare fee reductions increased the volume of privately insured service only in some cases.  “Of the seventeen procedures groups, twelve had the expected negative signs and seven of the twelve were statistically significant at the 5 percent or 10 percent level…”  Additionally, it appears that in some cases, a decrease in Medicare fees increases private-pay services even for procedures unrelated to those that experienced a Medicare fee decrease.  For instance, when Medicare cut cataract reimbursement rates, ophthalmologists supplied more services to private-pay patients, but not necessarily more cataract surgeries.

One drawback of this study is that it is fairly old and takes place before the rise of managed care.  Because managed care organizations can institute utilization restrictions, it is unclear if Medicare price decrease will increase the quantity of services supplied to private-pay patients as much now as they did in the late 1980s.


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