VOLUME RESPONSES TO MEDICARE PAYMENT REDUCTIONS WITH MULTIPLE PAYERS - A TEST OF THE MCGUIRE-PAULY MODEL

The effects of changing financial incentives on physician's practice b ehaviour have long been of interest to researchers and policy makers. We test a model of physician volume response within the context of mul tiple payers developed by Thomas McGuire and Mark Pauly. A panel data set covering discharges from about 200 hospitals in the US over 45 mon ths is used to carry out the empirical investigation. A fixed-effect m odel with generalized least squares and instrumental variable specific ations is used to compute empirical evidence of volume responses from eight specialties experiencing varying degrees of Medicare payment red uctions following the implementation of Omnibus Budget Reconciliation Acts of 1989 and 1990. The empirical findings are compared with McGuir e and Pauly's simulated predictions. We note that in examining physici an responses to Medicare payment reductions in the context of a multi- payer environment, it becomes evident that only fixing one payer's rei mbursement policy is at best a partial solution to cost containment. W e echo observations made by other analysts that physician responses to payment changes can be quite complex. Physicians do not all respond t o payment reduction in the same way. (C) 1998 John Wiley & Sons, Ltd.