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Health Care Costs and Financing

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Doctors sometimes compensate for Medicare fee cuts by increasing volume

The Omnibus Budget Reconciliation Act of 1987 reduced prevailing Medicare fees for selected medical procedures considered to be overpriced, including coronary artery bypass graft (CABG) surgery. Between 1987 and 1989, thoracic surgeons, whose incomes were markedly reduced by Medicare fee cuts for CABG, performed higher volumes of CABGs and more intense and costly (four- versus three-vessel) CABGs among both Medicare and private-pay patients to recoup about 70 percent of their income loss, concludes a study supported in part by the Agency for Health Care Policy and Research (HS08000).

The Health Care Financing Administration (HCFA), the agency that administers Medicare, incorporated an asymmetric 50 percent "volume offset" in the calculation of the Medicare Fee Schedule (MFS). In other words, HCFA assumed that physicians experiencing a Medicare fee reduction would increase volume and intensity to recoup half (not 70 percent) of the revenue loss. From a policy point of view, these results raise concerns about the extent to which price regulation, such as the MFS, can be relied on to control economy-wide health care costs, concludes Winnie C. Yip, Ph.D., of Harvard University.

Dr. Yip analyzed CABG data on 232 thoracic surgeons who performed CABGs in New York and Washington States in 1987 and 1989. A model was constructed to estimate physician response to Medicare fee cuts for CABG, which was based on State inpatient discharge abstracts, the Part B Medicare Annual Data Prevailing Files, and the Surgical Prevailing Charge System from the Health Insurance Association of America.

See "Physician response to Medicare fee reductions: Changes in the volume of coronary artery bypass graft (CABG) surgeries in the Medicare and private sectors," by Dr. Yip, in the Journal of Health Economics 17, pp. 675-699, 1998.

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