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Health Care Costs and Financing

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Effects of Medicare fee reductions vary by specialty and procedure

In an effort to control Medicare spending, Congress passed a law in 1989 that substantially reduced the amounts the Medicare program reimbursed physicians using a Medicare Fee Schedule (MFS). A recent study examined physicians' responses to these fee changes and in particular whether the reduced fees prompted physicians to provide fewer services. The researchers found that the effects vary, depending on the particular procedure, how much of a doctor's income that procedure constitutes, the doctor's specialty, and other factors beyond fee reduction. The study was conducted by researchers at Georgetown University and supported by the Agency for Healthcare Research and Quality (HS08689).

The researchers used a physician-level database covering the period 1991 through 1994, the Medicare Physician Provider File, and other data sources to analyze the effects of MFS reduction on the number of cataract procedures performed by ophthalmologists and hip and/or knee repairs or replacements performed by orthopedic surgeons. The years 1991 to 1992 saw the greatest decline in fees for all four procedures, but the volume of all four procedures increased between 10 and 18 percent, presumably so doctors could maintain their target incomes.

This volume response was also evident between 1992 and 1993, as cataract operations and hip replacements increased by 1.2 percent and 10.5 percent, respectively. Reduced fees for cataract operations had a potentially strong negative impact on the income of ophthalmologists. However, since ophthalmologists tended to substitute other procedures for cataract operations, the overall impact on their income was small. This substitution effect reduced the amount of cataract operations performed on Medicare patients following the fee reduction.

Surprisingly, the volume of hip repairs and replacements fell by almost 1 percent in response to an increase in fees of 8.7 percent and 4.2 percent, respectively. In contrast, more knee replacements resulted from higher fees between 1993 and 1994. As the fee for hip and knee replacements declined, orthopedic surgeons performed fewer joint surgeries. These findings suggest that the MFS does have the potential to influence physicians' supply decisions, but these effects are complex and may vary by specialty and services, conclude the authors.

More details are in "Physicians' responses to Medicare fee schedule reductions," by Jean M. Mitchell, Ph.D., Jack Hadley, Ph.D., and Darrell J. Gaskin, Ph.D., in Medical Care 38(10), pp. 1029-1039, 2000.

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