1. Factors Affecting Physicians Medicare Service Volume: Beneficiaries Treated and Services per Beneficiary By Jack Hadley and Jim Reschovsky 2005 Academy Health Research Meeting Boston, MA

2. 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?

3. Medicare volume growth (MedPAC June, 2005 report)

4. 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?

5. 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

6. Conceptual Framework Profit-maximizing firm supplying services to multiple markets (privately insured, Medicare, Medicaid) Std. model: Quantity MDR services a function of 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 physicians 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

7. Data 2000-2001 Community Tracking Study (CTS) Physician Survey linked to claims for a 5% sample of Medicare beneficiaries. 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.

8. 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 behaviorphysicians 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

9. 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)

10. 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

11. 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

12. 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

13. 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)

14. Conclusions Reducing Medicare fees will reduce Medicare spendingconsistent 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

15. 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

16. 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