Factors Affecting Physicians’
Medicare Service Volume:
Beneficiaries Treated and
Services per Beneficiary
2005 Academy Health Research Meeting
Boston, MA
By Jack Hadley and Jim Reschovsky
Research Context
 Background:
• Volume of Medicare physician services growing rapidly
(leading to rapid increase in program costs)
• Large geographic variations in services provided to
beneficiaries that are attributed to practice patterns, not
clinical or other demand differences.
 Policy issues:
• Effectiveness of sustainable growth rate policy in question
- Will spending go up or down if fees are cut?
• Should Medicare Fee Schedule be modified or scrapped?
Medicare volume growth
(MedPAC June, 2005 report)
Research Context
 Background:
• Volume of Medicare physician services growing rapidly
(leading to rapid increase in program costs)
• Large geographic variations in services provided to
beneficiaries attributable to practice patterns, not clinical
or other demand differences.
 Policy issues:
• Is the sustainable growth rate (SGR) policy effective?
- Will spending go up or down if fees are cut?
• Should Medicare Fee Schedule be modified or scrapped?
Study goals
 Estimate models of the quantity of services
physicians provide to FFS Medicare patients
• # Unique beneficiaries treated per physician
• Service intensity (RVUs per beneficiary treated)
 Assess effect of:
• Variations in Medicare fees
• Local market conditions
• Other financial incentives
Conceptual Framework
 Profit-maximizing firm supplying services to multiple
markets (privately insured, Medicare, Medicaid)
 Std. model: Quantity MDR services a function of
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Medicare Fees
Fees paid by other payers
Cost of inputs
Demand from Medicare beneficiaries and from other mkt. segments
 McGuire & Pauly (1991) extension
• Physician utility also affected by demand inducement
• Incentives for inducement depend on how important payer is to total
physician’s income (e.g., “Medicare income”)
 Implications of McGuire & Pauly
• Quantity might increase or decrease in response to lower fee
• Physician response depends on Medicare income
Data
 2000-2001 Community Tracking Study (CTS)
Physician Survey linked to claims for a 5% sample
of Medicare beneficiaries.
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CTS survey nationally representative, N=12,000
Linkage based on physician UPIN number
Physicians with minimal Medicare involvement excluded
Linked sample = 7,456 physicians
 Medicare claims data includes:
• All services provided by CTS physician to their Medicare
patients in the 5% sample.
• Includes detailed procedure, diagnosis codes and basic
patient characteristics.
The Medicare Fee Variable
 Defined as allowed reimbursement per RVU
 Why should this vary?
• Adjusted across geographic areas for variations in types of input
costs, but adjustment imperfect and defined over large areas
• Weights for input cost adjusters vary by type of service
• Payment variations for site of service
• Variations in intermediary behavior—physicians can “game” system
 Implications
• Physicians can manipulate the effective fee by altering the mix of
services they provide
• Medicare fee is likely endogenous, requiring IV estimation
Other Key Explanatory Variables
 Medicare income = total net income * percent
practice revenue from Medicare
 Medicare (non-Medicare) demand:
• Ave. income of elderly (nonelderly) patients
• # competing physicians per 1,000 elderly (nonelderly) in
county
 Inducement:
• Practice ownership/compensation methods
• Perceived financial incentives
• Importance of income
• Perceived market competition
• MC penetration (% capitated revenue, lagged)
Other Explanatory Variables
 Percent of physicians in county who are specialists
• (interacted with PCP dummy)
 Physician characteristics
• Detailed medical specialty, type of practice, age, gender,
race, ethnicity, years in practice, USMG, hours worked
 Avg. number diagnoses per patient (case mix)
 Input cost measures
 Metro/non-metro and population size
Key Results – Medicare fees
 Medicare fee and Medicare income endogenous
 Effect of Medicare fee on quantity of services
provided is positive.
• Inelastic wrt # beneficiaries treated (iv = .26 - .61)
• Elastic wrt service intensity (iv = 1.04 - 1.71)
 Endogenity bias negative, explaining why some
studies find evidence of volume offset behavior
• OLS elasticity in service intensity equ. is negative (-.31)
 Evidence of backward bending supply, but at
implausibly high Medicare income levels
Key Results - Inducement
 Evidence of physician inducement, but it operates
through manipulating the mix of services to
increase effective Medicare fee rather than by
increasing the quantity of services provided.
• Affected by practice ownership, compensation
techniques, strong preferences for income, market
competition
• Operates both across and within local markets
Key Results – Patient Demand and
Medicare Service Volume
 Greater demand by Medicare beneficiaries leads to
greater Medicare service volume (# benes &
intensity)
 Greater demand by other patients leads to lower
Medicare service volume (# benes & intensity)
Conclusions
 Reducing Medicare fees will reduce Medicare
spending—consistent with standard theory
 But some offset through manipulation of service
mix or billings to increase effective fee per RVU
 Medicare quantity sensitive to local market
conditions
• Fees, market competition, and demand factors
 It is important to treat the Medicare fee as
endogenous
Policy Implications
 RVU structure should be reviewed to identify sources of
and opportunities for manipulation
 Single national fee inconsistent with local mkt. variations
• Ignoring local factors that affect service volume (# Physicians/pop,
% specialists, private & MDR demand) may lead to undesirable
geographic variations in services (costs) per beneficiary.
 Elastic supply response suggests:
• Likely cost /access tradeoffs (lower fees will reduce access)
• Service-specific fee setting could be used to affect practice
patterns
Time to Rethink the Purpose of the
MFS?
 Now structured to reflect costs only
 Could be restructured to:
- Encourage desirable (e.g. cost effective) services, while
discouraging undesirable services
- Reward better outcomes (P4P)
- Reflect local market conditions:
 e.g., lower fees where the supply of physicians relative to the
population is higher
 Consider alternatives?
• Demand side cost sharing
• Competitive contracting