Physician Behavioral Response to a Medicare Price Reduction

Objective: To investigate at the individual practice level physician behavioral responses to the Medicare fee reductions mandated in the Omnibus Budget Reconciliation Act of 1989. Symmetric and nonsymmetric behavioral responses are modeled and investigated.

Data Sources: Volume index calculated from data in the Part B Medicare Annual Data (BMAD) Provider Files for 1989 and 1990. The pricing data are from the Procedure Files.

Study Design: A fixed-effects model in carrier and in specialty is employed.

Data Collection: No direct data collection is required as BMAD files are used in the study. Price and volume variables are expressed as Fisher indexes of change.

Principal Findings: The results show nonsymmetrical behavioral response because practices that did not face significant fee reductions do not exhibit behavioral change. By contrast, losers partially compensate for the fee reductions. For every dollar cut in their fees, physicians recoup approximately 40 cents by increasing volume. Loser behavioral responses vary by specialty.

Conclusions: The presence of a volume response suggests that price control alone is not sufficient to cap rising healthcare costs. This indicates that additional or other tools must be considered if cost containment is to be attained.