Geographic Variations in Medicare Physician Costs: The Role of Market Factors, Reimbursement, and the Practice Organization
- Presenter:
Chair: Michael Morrisey; Discussant: Michael Morrisey Tue June 6, 2006 10:45-12:15 Room 313
Authors. James Reschovsky (jreschovsky@hschange.org), Center for Studying Health System Change
Title: Geographic Variations in Medicare Physician Costs: The Role of Market Factors, Reimbursement, and the Practice Organization
Rationale: There are large geographic variations in Part B Medicare costs, even after controlling for differences in patient health status. There is a large literature, largely by John Wennberg and his Dartmouth colleagues, documenting these differences. However, their analyses of the underlying causes are limited because their data is largely at an ecological level. This analysis provides greater understanding of the factors underlying geographic cost variations using micro level data on physicians and their Medicare patients.
Objectives: The objective of this paper is to estimate a theoretically consistent model of physician provision of services to their Medicare patients that incorporates information regarding patient demand, the physician, his/her practice (including methods of physician compensation and revenue sources), Medicare payment and other market factors. Using this model, reasons underlying geographic cost variations will be explored.
Methodology: This uses a unique dataset containing information on a nationally representative sample of physicians from the 2000-01 Community Tracking Study Physician Survey merged with Medicare claims data on their patients. We examine how patient, physician, practice (size, type, how physicians are compensated, etc.), market, and Medicare programmatic factors contribute to the large geographic variations in Medicare physician costs. The CTS data are gathered in 60 representative local markets nationwide. Costs per beneficiary are specified as the product of the number of physicians per beneficiary in the market, the average quantity of services per beneficiary (in RVUs) among physicians treating Medicare patients, and the payment per RVU. Each is estimated in a theoretically consistent manner. The latter two components follow from previous work (Hadley and Reschovsky, 2005), in which physicians’ Medicare service volume was estimated using a specification that followed the theoretical work of McGuire and Pauly (1991). It recognized that the Medicare fee was potentially endogenous and that physicians might induce demand. In this paper, I decompose geographic variations in beneficiary costs into components that are attributable to patient, physician, practice, payment, and market factors.
Results: Preliminary results confirm that there are sizable variations in the average cost of treating Medicare patients across sites. Physician supply, the local mix of specialists and primary care physicians and demand factors all contribute to geographic variations, in part by influencing how intensively physicians treat their Medicare patients. Medicare’s fee system, in which physicians are, for the most part, paid a uniform rate according to the costs of providing services, also influences treatment patterns and serves to accentuate geographic cost differences.
Conclusions: Medicare’s payment system fails to incorporate both local demand side and supply side market differences that influence the quantity of services provided to beneficiaries. Hence, the uniform payment system encourages disparities in treatment patterns, and implicitly in the efficiency by which care is delivered across areas. Consideration should be given to setting localized sustainable growth rates or setting fees according to market characteristics in an effort to more closely resemble market prices.
