Medicare Fees and the Volume of Physicians’ Services

1. Medicare Fees and the Volume of Physicians’ Services by Jack Hadley, Jim Reschovsky, Catherine Corey, and Stephen Zuckerman Health Economics Interest Group Meeting, June 27, 2009

2. Background and Context • Medicare payments for physician services growing rapidly • SGR ineffective in limiting physician cost growth • Changes all fees in all areas by the same amount • Costs increase despite declining real fees • Cost growth largely driven by volume • Suggests volume offsets, but theoretically unlikely • Understanding supply responses to fee changes important for payment reform

3. Study Questions • Do physicians provide more or fewer services to Medicare patients in response to a fee reduction? • Is the magnitude and/or direction of the response the same for all services? • Are there cross-price and/or demand-shift effects? • Do physicians’ financial incentives in their practice influence the volume of services provided? • What are the implications for Medicare’s physician payment system? • Changes to the SGR • Volume offset assumptions

4. Research Design • Natural experiment – • Exploits exogenous geographic and over-time (2001 – 2005) variations in Medicare payment formula design to construct measure of Medicare fee differences • Relate Medicare fee differences to physicians’ supply of services using a two-part model • Probability of any provision • Conditional quantity supplied • Data: • 2000-01 and 2004-05 CTS Physician Survey (N=13,707) • Linked with claims from their FFS Medicare patients in 2000, 2005. • Claims used to measure service supply & patient case mix

6. Calculation of Medicare fee differences • MCR_FEE_DIFijt= Paymtijt-Paymtijt* • Where: • Paymtijt* = RBRVS-based ideal payment - approximation of minimum average cost (Pmcr) • Paymtijt = actual Medicare payment (Pmcr-hi…Pmcr-lo) • i = service • j = payment area • t = time period

7. Payment Formula Adjustments To Reflect RBRVS Ideal More Accurately • Greater geographic detail in calculating GPCIs: • Work GPCI • Practice expense GPCI (both labor and RE components) • 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)

8. Descriptive Characteristics, 2005

9. Key Independent Variables (hypothesized effect on volume) • Medicare Fee Differences (+) • 99213 (intermediate office visit ): Avg. payment = $46.01 • Calculated fee difference = -$3.23 (range=+/- $15) • Generic cross-price variables (?) • Medicare fee difference per work / practice expense RVU • Physician’s compensation incentives (+) • Strong/moderate (owners & employees with productivity incentives) vs. weak (fixed compensation) • Demand-shift variables (hypothesize positive effect on Medicare supply) (+) • Practice accepts all/most new private patients • Practice treats Medicaid patients • % Medicare patients with supplemental insurance • Perception of a very competitive market environment • Physician specialty , type of practice, and other characteristics • CTS site fixed effects and year dummy

10. Medicare Fee Differences and Service Volume: Model Coefficients & Simulation a. p < .01; b. .01 < p < .05; c. .05 < p < .10

11. Supply response to 10% reduction in fees A MCR_FEE_DIF coefficient statistically significant (p≤.10) in prob. of any provision equation; b MCR_FEE_DIF coefficient statistically significant (p≤.10) in the conditional volume equation.

12. Cross-Price Results a P ≤ 0.01; bP ≤ 0.05; cP≤0.10

13. Financial Incentives: Simulated Impact on Volume if all Physicians on Fixed Salaries a Financial incentive coefficient significant in both equations; b Financial incentive variable significant only in first equation (probability of any provision).

14. 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; larger volume changes for services with low marginal costs • Large payment areas distort practice patterns • Better info needed on underlying costs if goal is to maintain incentive neutrality

15. 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 • More detailed cost assessment to adjust RVUs • Primary candidates for comparative effectiveness review

16. Policy Implications 3:Change Physician Incentives • Use the payment system to encourage organizations that employ salaried physicians or otherwise encourage cost-efficient care • Change physician incentives through capitation, greater bundling (e.g. episode based payment)

17. So Why Has Service Volume Grown While Real Fees Fallen? • Many fees still too high • If costs 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., MSAs and high-deductible plans • Increasing uninsurance