Physicians' responses to Medicare Fee Schedule reductions

BACKGROUND. Relatively little empirical research has addressed physicians' responses to fee changes under the Medicare Fee Schedule. OBJECTIVES. We analyzed Medicare claims data for ophthalmologists and ortho pedic surgeons for the years 1991 through 1994 to evaluate the relative imp ortance of profit-maximizing and target-income theories in determining phys icians' supply responses to specific Medicare fee reductions. RESEARCH DESIGN. This study was designed to estimate the impact of fee redu ctions for cataract extractions and major joint repair/replacement procedur es through pooled cross-section time series data. RESULTS. The supply function for cataract extractions has both strong own-p rice and cross-price effects, as well as a highly significant negative inco me effect. Yet, the magnitude of the income effect is small; thus, the subs titution effect dominates the income effect. Similarly, in the supply funct ions for joint procedures, the own price has the expected positive sign, im plying that as the fee declines, orthopedic surgeons will perform fewer joi nt surgeries. However, the cross-price variable has the correct sign only i f treated as exogenous, and the variables measuring the income effect have the wrong sign, although their magnitude is small. CONCLUSIONS. These results suggest that the Medicare Fee Schedule does have the potential to influence physicians' supply decisions, but these effects may vary by specialty and service.