Volume responses to exogenous changes in Medicare's payment policies

The purpose of this study is to obtain estimates of the "volume offset," which is the slippage in the costs or the savings that would, in the absence of behavioral responses, result from exogenous changes in Medicare's payment policies. An estimate of this offset is essential to accurate cost estimation for fee proposals under Medicare. Estimates are obtained using Medicare claims data from Colorado for 1976 and 1978, before and after implementation of an abrupt and substantial change in the way Medicare's fees were determined. Reliable estimates could be obtained only for two specialty groups-general practitioners and internists. For these physicians, the results indicate that about half of an initial drop in their Medicare receipts caused by a change in payment policy would be offset by an increase in their volume of services. For physicians whose receipts would increase because of the policy change, the best estimates indicate that about a third of their initial gain would be offset by a fall in the volume of services they provide. The difference in response between gaining and losing practices is not a statistically significant one, however. One could conclude from this study that--for both gaining and losing practices--changes in volume would offset about half of any initial change in receipts caused by a payment change.