Medicare Fees and the
Volume of Physicians’
Services
by Jack Hadley, Jim Reschovsky,
Catherine Corey, and Stephen
Zuckerman
Academy Health
June 28, 2009
Study Questions
1. Do physicians provide more or fewer services to
Medicare patients in response to a fee reduction?
2. Is the magnitude and/or direction of the response
the same for all services?
3. Do physicians’ financial incentives in their practice
influence the volume of services provided?
4. What are the implications for Medicare’s physician
payment system?
• Changes to the SGR
• Volume offset assumptions
Study Design
 Estimate physicians provision of specific services to
Medicare patients as function of Medicare fee
differences (+ other factors)
 We use exogenous geographic and over-time
payment variations to measure differences in fees
 Data:
• 2000-01 and 2004-05 CTS Physician Survey (N=13,707)
• Linked with 2000 & 2005 Medicare claims of their FFS pts.
 Estimate 2-part models:
• Probability of providing service
• Volume of service provided, given any
Calculation of Medicare Fee
Differences
 We measure slope of MC curve for physicians
providing specific services to Medicare patients
 Actual payments do not perfectly correspond to
payment neutrality, as envisioned under RBRVS
due to data limitations and policy decisions.
 Key measure is “Medicare fee difference” (MFD):
• MFDijt = Paymtijt- Paymtijt*
• Where: Paymtijt = actual Medicare payment
Paymtijt* = payment based on closer approx. of
pure RBRVS-based payment
Payment Formula Adjustments To Reflect
RBRVS Ideal More Accurately (Paymtijt* )
 Greater geographic detail in calculating GPCIs:
• Counties/metro areas rather than larger Medicare
payment areas
 More accurate Practice Expense RVU assignment
in 2000
 Eliminated “other policy goals” aspects of MFS
• ¼ to full work GPCI adjustment
• Work GPCI floor
• Medicare incentive program bonus payments
 Accounted for decline in real fees, 2000-2005
• Annual updates < input price increases (MEI)
Figure 1. Physician Supply in a multi-market model
Price
Pprv
MR
MC
AC
B
Pmcr-hi
C
Pmcr
Pmcr-lo
E
A
D
Dprv = AR
Qp-hiQpQp-lo
Qlo
Qtot Qhi
Quantity of service
provided
Key Independent Variables
(hypothesized sign)
 Medicare Fee Difference (+)
 Physician’s compensation incentives (+)
• strong/moderate (e.g., owners) vs. weak (e.g., straight salary
with no bonuses), etc.)
 Generic cross-price variables (?)
 Demand-shift variables (+)
• Whether the practice accepts all/most new private patients
• Whether the practice treats Medicaid patients
• Percentage of Medicare patients with supplementary insurance
• Perception of a very competitive market environment
 Also, physician specialty and other characteristics, site
& time dummies
Supply response to 10% reduction in fees
a
MFD coefficient statistically significant (p≤.10) in prob . of any provision equation;
coefficient statistically significant (p≤.10) in the conditional volume equation.
b MFD
Financial Incentives: Simulated Impact on
Volume if all Physicians on Fixed Salaries
Service
CPT code/
Test
% Change in Volume
Office Visits
99213
-26a
99214
-42a
99232
-42a
99233
-44a
99243
-13b
99244
-28b
EKG
-26a
Echo
-7
Hospital Visits
Consultations
Diagnostic
Tests
a
Financial incentive coefficient significant in both equations; b Financial incentive variable
significant only in first equation (probability of any provision).
Policy Implications 1:
Medicare Fee Schedule
 Fee schedule can be used to control costs
• No evidence of volume offset response
 Uniform fee updates (SGR) distort practice patterns
• Volume response differs across services
 Large payment areas distort practice patterns
• Create unintended differences between actual fee and
ideal RBRVS-based fee
 Need better data on underlying costs if goal is to
maintain incentive neutrality
Policy Implications 2: Move Away
From Goal of Payment Neutrality
 Results imply altering fees in response to value of
service:
• Pay more for services that should be encouraged
• Pay less for services thought to be ineffective
 Target services with rapid volume growth not
explained by new technology
• For more detailed cost assessment to adjust RVUs
• For comparative effectiveness review
 Better yet, move away from FFS as payment model
• Capitation, bundling, episode-based payment, etc.
So Why Has Service Volume Grown
While Real Fees Fell?
 Many fees still too high
• Costs may be falling faster than fees
 Physicians’ profit-seeking behavior manifested
through new practice arrangements,
• For instance, greater capture of profits through
equipment/facility ownership (e.g., imaging)
 Medicare does not exist in a vacuum
• Utilization controls weaker in Medicare than commercial
plans
• Greater patient cost sharing in private insurance, e.g.,
HSAs and high-deductible plans
• Increasing uninsurance