A tale of two bounties: The impact of competing fees on physician behavior

This study examines how the volume of privately insured services provided i n hospital inpatient and outpatient departments changes in response to redu ctions in Medicare physician payments. We hypothesize that physicians consi der relative payment rates when choosing which patients to treat in their p ractices. When Medicare reduces its payments for surgical procedures, as it did in the late 1980s, physicians are predicted to treat more privately in sured patients because they become more lucrative. We use data from 182 hos pitals for seventeen major procedures groups, covering a forty-five-month p eriod between 1988 and 1991 that encompasses a twenty-four-month period bef ore the reduction in Medicare fees and twenty-one months after the reductio n. Our findings are consistent with the predictions for a number of procedu re groups, but not for all of them. One implication of the findings is that societal savings from Medicare fee reductions are overstated if one does n ot also consider spillover effects in the private insurance market.