PHYSICIAN FEE POLICY AND MEDICAID PROGRAM COSTS

We investigate the hypothesis that increasing access for the indigent to physicians' offices shifts care from hospital outpatient settings a nd lowers Medicaid costs (the so-called ''offset effect''). To evaluat e this hypothesis we exploit a large increase in physician fees in the Tennessee Medicaid program, using Georgia as a control. We find that beneficiaries shifted care from clinics to offices, but that there was little or no shifting from hospital outpatient departments or emergen cy rooms. Thus, we find no offset effect in outpatient expenditures. I npatient admissions and expenditures fell, reducing over all program s pending 8 percent. Because the inpatient reduction did not occur in am bulatory-care-sensitive diagnoses, however, we cannot demonstrate a ca usal relationship with the fee change.