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 orthopedic surgeons for the years 1991 through 1994 to evaluate the relative importance of profit-maximizing and target-income theories in determining physicians' supply responses to specific Medicare fee reductions. RESEARCH DESIGN. This study was designed to estimate the impact of fee reductions for cataract extractions and major joint repair/replacement procedures through pooled cross-section time series data. RESULTS. The supply function for cataract extractions has both strong own-price and cross-price effects, as well as a highly significant negative income effect. Yet, the magnitude of the income effect is small; thus, the substitution effect dominates the income effect. Similarly, in the supply functions for joint procedures, the own price has the expected positive sign, implying that as the fee declines, orthopedic surgeons will perform fewer joint surgeries. However, the cross-price variable has the correct sign only if 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.