Relative Prices Payer Mix and Regional Variations in Medical Care

Project: Research project

Description

We propose to study physician responses to Medicare fee changes. Specifically, we empirically test 1) whether physicians cost shift by raising their prices charged to privately insured patients in response to Medicare fee cuts, and 2) whether regional variations in Medicare spending are due to the profitability of Medicare relative to private insurers causing providers to alter their payer mix. We test these ideas using actual privately insured prices for physician services from FAIR Health data. A large volume of research has established that there are substantial variations in Medicare spending across regions of the US (Fischer 2003a,2003b), and that the additional spending in high-cost areas has little known value (Fischer et al. 2009). Far less is known about the causes of such variations in Medicare or how the spending and utilization of privately-insured patients varies across regions. The prevailing hypothesis is that local norms, through factors such as physicians preferences for treatment intensity, create a high degree of homogeneity within regions, yielding very similar spending levels for Medicare and the privately insured. While one article provides a test and finds some support for related ideas (Chandra and Staiger, 2007), other research has provided some evidence that Medicare and private spending in a region are not positively associated (e.g., Franzini et al., 2010). As a corollary to this prevailing hypothesis, a number of researchers and policy makers hypothesize that cost-shifting is prevalent, where providers offset reductions in Medicare fees with increases in their fees to private insurers. [what is the link between norms and cost-shifting? They may be related, or people may be self-contradictory without realizing it. Avoiding self-contradictory beliefs is one of the main motivations for needing to bring theory to bear on these topics.] We propose to employ rich, newly-available datasets in conjunction with a widely-familiar economic theory of provider behavior to accomplish two specific aims. Specifically, we will use data from FAIR Health and Thomson Reuters MarketScan to test whether geographic variations in Medicare spending for physicians can be explained by the profitability of Medicare relative to other payers, as hypothesized by the economic model of stepwise demand. The central insight from the stepwise-demand model in the context of variations in Medicare spending is the idea that Medicares profitability relative to other payers affects Medicare as providers respond to Medicares profitability by altering their payer mix. The mechanism providers have to accomplish this is by altering the prices they charge to privately-insured patients. Contrary to cost-shifting, this yields the hypothesis that reductions in Medicare fee changes should be met with reductions in prices for privately-insured patients.
StatusFinished
Effective start/end date8/1/133/31/17

Funding

  • HHS: Agency for Healthcare Research and Quality (AHRQ): $450,824.00

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Relative prices
Medicare
Medical care
Regional variation
Fees
Physicians
Profitability
Cost shifting
Health
Costs
Insurer
Politicians
Factors
Demand model
Homogeneity
Economic theory
Physician services
Charge