Unbiased Analysis of Today's Healthcare Issues

The kindly physician or the profit maximizer?

Written By: Jason Shafrin - Apr• 02•17

In the U.S. physician fees are largely set through regulation or negotiation with insurers. For physicians accepting Medicare or Medicaid patients, fees are set by government entities (i.e., the Centers for Medicare and Medicaid Services for Medicare reimbursement for the former and state Medicaid agencies for the latter). Rates for physicians accepting patients with private health insurance are set through negotiations between the insurer and the physician (or more likely the physician’s group or larger network). Within each payer, reimbursement for physician services generally does not vary although payment rates do vary significantly between Medicare, Medicaid and commercial payers.

What would physician pricing look like in an unregulated market? A paper by Johar, Mu, Gool and Wong (2017) attempts to answer this question. They use a study of specialist fees in Australia. Australia uses what is known as a balance billing approach.

In Australia, the tax-financed universal public health insurance, Medicare, provides a government determined fixed rebate for each type of medical service. These rebates set a floor price for a given service, but there are no controls over the maximum fees that doctors can charge to their patients. The patient pays the gap between the doctor’ s fee and the Medicare rebate as an out-of-pocket (OOP) cost. OOP costs are equal to zero when the doctor’ s fee is equal to the rebate. No private health insurance can be purchased for out-of-hospital services that are covered by Medicare.

Note that the Australian system is not completely unregulated. For instance, all individuals need a referral from a general practitioner to visit a specialist. Further, the referral names an individual specialist on the form and switching the referral to another specialist would require another GP visit. Thus, there is room for significant physician negotiating leverage once the patient arrives.

The authors use the 45 and Up Study data which contain over a quarter of a million non-institutionalized patients in Australia.

…in an unregulated fee-setting environment, specialist physicians practise price discrimination on the basis of their patients’ income status. Our results are consistent with profit maximisation behaviour by specialists… There are large variations across specialties, with neurologists exhibiting the largest fee gap between the high-income and low-income patients.

They find that the overall average fee gap is AU$26.38, which is about 38% of base payment the Australian Medicare system pays for a specialist visit. The authors find that physicians are more likely to give larger discounts to older individuals, those without private insurance, those unemployed and that these discounts based on patient demographics, insurance status and work status are larger for low compared to high-income individuals.

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