What if Medicare spends reimburses physicians too generously for a certain service. Will reducing reimbursement for that service decrease utilization and cost?
A study by Mitchell, Hadley and Gaskin (2002) attempts to answer this question by examining the impact of changing Medicare reimbursement for cataract surgeries. Between 1992 and 1994, Medicare decreased fees paid for cataract extractions by 17.4%. After the fee decrease, the authors observe the following:
…we found that the Medicare cross-price [elasticity] is significant and negative, implying that a 10% reduction in the fee for a cataract extraction will cause ophthalmologists to supply about 5% more non-cataract services. Second, the income variable is highly significant, but its impact on the supply of non-cataract services is trivial. This suggests that physicians behave more like profit maximizing firms than target income seekers.
What this means is that when Medicare decreases one specific fee, physicians will substitute other services in its place. In this case, ophthalmologists replace cataract surgeries with non-cataract services. The authors do not estimate the total effect on prices, but if non-cataract services are less expensive than cataract surgeries, than this almost certainly decreases Medicare expenditures.
The generalizability of this finding, however, is unknown. A cataract surgery is fairly elective meaning that it can be easily postponed temporarily or indefinitely. When necessary, postponing a cataract surgery will not affect patient health, but will influence their quality of life through worse vision. Thus, ophthalmologists can easily substitute non-cataract services for cataract services with little effect on patient health. In cases where the fee-reduction does not have such a clear substitute for services, it is unclear how physicians will respond.
- Mitchell, Hadley and Gaskin (2002) “Spillover Effects of Medicare Fee Reductions: Evidence from Ophthalmology,” International Journal of Health Care Finance and Economics, 2, 171-188.