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Physician volume response to price controls
1World Bank, Washington, DC 20433, USA.
Insights
Physician fee reductions can lead to increased service volume, offsetting cost savings. This "volume response" indicates price controls alone are insufficient for healthcare cost containment.
Area of Science:
- Health Economics
- Healthcare Policy
- Medical Practice Management
Background:
- Escalating healthcare costs present a significant challenge to health systems globally.
- Price controls are frequently proposed as a strategy to manage healthcare spending growth.
- However, provider responses, such as increased service volume, can diminish the effectiveness of price controls.
Purpose of the Study:
- To investigate the physician behavioral response to fee reductions.
- To quantify the volume response in the U.S. Medicare program following fee cuts.
- To assess the impact of physician behavior on healthcare cost containment strategies.
Main Methods:
- Analysis of U.S. Medicare program data from 1989-1990.
- Examination of physician practice-level data following fee reductions mandated by OBRA89.
- Statistical analysis to determine the relationship between fee changes and service volume.
Main Results:
- A 10% reduction in physician fees led to a 3.7% increase in the volume of services.
- Physicians recouped approximately 37 cents for every dollar reduction in fees through increased volume.
- This demonstrates a significant behavioral offset in response to fee controls.
Conclusions:
- Physician "volume response" partially negates savings from fee reductions.
- Price controls alone are insufficient for effective healthcare cost containment.
- Additional or alternative strategies are necessary to achieve sustainable cost containment in healthcare.
Abstract:
The need to contain escalating health care costs is one of the major challenges facing health care systems today. It is often argued that price control is an effective tool for reducing both the level and the rate of growth in health spending. However, experience suggests that these savings may be partially offset by volume increases. These are initiated by providers, particularly physicians, who attempt to provide more health care goods and services in order to recapture lost revenues. This phenomenon is called the behavioral offset or volume response. This paper examines the physician behavioral response to the fee reductions at the practice level using the data from the U.S. Medicare program in 1989 and 1990. This is the most recent data currently available at the practice level for the Medicare program at this writing. This period of time corresponds to the fee reductions mandated by the Omnibus Budget Reconciliation Act of 1989 (OBRA89). The results show that the volume of services whose fees were cut by OBRA89 increased by 3.7% for every 10% fee reduction. This means that, for every dollar cut in their fees, physicians would recoup 37 cents by increasing volume. The presence of a volume response suggests that price control alone is not sufficient to cap rising health care costs. This indicates that additional or other tools must be considered if cost containment is to be attained.