Code Red: Two Economists Examine the U.S. Healthcare System

May 18, 2010

What if Medicare Cut Physician Fees?

Filed under: Budget,Health spending,Medicare — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:57 am

Congress must decide before June 1st whether to override scheduled cutbacks in Medicare physician fees. The cutbacks are the result of a complex formula that automatically schedules fee reductions in response to increases in physician “productivity” (i.e., physicians are billing for more remunerative procedures) and the need to balance the Medicare budget. This is an annual affair and thus far Congress has never failed to undo the cutbacks and keep doctors and seniors happy.

This time is a little different. For one thing, the stakes are a lot higher – fees are slated to fall by 21 percent and blocking the cutbacks will cost $20 billion annually. This is also a test for Obamacare; future cutbacks in provider fees are the main source of the projected cost savings. If Congress won’t fulfill its cost cutting obligations now, why should we expect it to do so later? It is much easier to keep fees intact and grow the deficit just a little bit higher.

The main argument for keeping fees intact is simple: lower Medicare fees may compromise access. If we ignore the extremists who claim that lower fees will drive doctors out of business (there is little if any evidence to support this), it is still true that some doctors may choose to see fewer Medicare patients or provide them with fewer services.

Where’s the harm? At most, a small percentage of doctors may close their doors to Medicare while others make modest cuts in the number of services they provide. (Some theorists worry that doctors may increase Medicare services to offset the fee reductions, although the evidence suggests that any such “inducement” would still yield a net reduction in Medicare spending.) But haven’t we been told that we are over-doctored? That we have too many specialists doing too many procedures? Lower fees combined with fewer procedures sounds like a win/win proposition. Better still, why not restore cuts to primary care fees and leave the specialist fee reductions intact?

Physicians who curtail access to Medicare patients may try to see more privately insured patients. Had there not been a backlash to managed care, private insurance fees would not be much higher than Medicare fees and physicians would not be so eager to abandon Medicare. Thus the demonization of HMOs makes it difficult to save traditional Medicare.

But suppose managed care mounts a comeback as employers and individuals seek out lower cost insurance options. Insurers would assemble smaller networks and reduce physician fees. If this happens, then Medicare could lower its fees without sacrificing access. Ironically, the future of Medicare may be tied to the success of HMOs!

Physicians will be the big losers in this scenario. But if we are to spend less money on medical care without fundamentally changing how it is produced (see my previous blogs), then providers must necessarily receive less money. It’s a zero sum game. So we are left with an age old question in health economics: Do physicians make “too much money?” There is no good answer. But as much as I admire physicians, who sacrifice ten years of post-undergraduate earnings before finally earning their six figure salaries, I wonder if the Medicare budget must ultimately be balanced on their backs.


  1. David,

    You posit where’s the harm? Let’s look at this study which looks at emergency room use between insureds, uninsureds and medicare/medicaid:
    High use of EDs in Medicaid likely reflects in part little or no cost sharing for health services use, and perhaps lack of access to
    office-based physicians (because of low physician reimbursement rates under Medicaid)

    We could see healthcare costs in this country rise due to increased use of the ER because of lack of access to doctors who accept Medicare. Currently, Medicare/Medicaid enrollees use the ER almost 1/3 more than insureds or uninsureds.

    Comment by Brian H — May 21, 2010 @ 5:20 pm

    • Brian,

      Your concerns are well taken and, indeed, this has occurred for the Medicaid population. But doctors who do not want to take care of Medicaid patients have plenty of options. If they decide to bail out on Medicare as well, they may as well go out of business. And that does not seem like a viable option. I think Medicare patients will be further insulated if private sector fees fall as well. Am I sure of this? No. But I don’t see how we can simultaneously believe that we receive too much medical care at too high prices and we should not dare to curtail supply.

      I do worry a lot about the long run implication of reduced fees. Physicians leave college, pile up a ton of debt, and defer earning a living for 8-9 years. Will our best and brightest choose other professions? I don’t want stupid doctors. That is why I asked the question about physician incomes.

      I wish I had a more definitive answer.

      Comment by dranove — May 24, 2010 @ 8:18 am

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