Measuring prices of Medicare physician services

This study develops two sets of price indices for Medicare physician services. The first measures price changes, and the second measures geographic price differentials. The indices can be used to adjust Medicare physician spending data to examine growth or variations in the volume and intensity of services. In both instances, it is necessary to apply an index form that reflects both the rapid changes and variability in the mix of physician services received by Medicare beneficiaries and their relative importance. This suggests that an index based on a fixed basket of services (e.g., a Laspeyres index) can produce a biased measure of price. An alternative methodology based on the Fisher's Ideal Index form was used. This index allows service weights to vary over time and across areas. In the case of price change, the index is "chained" to acknowledge the introduction of new services over several years. It is concluded that the Fisher's Ideal approach is essential for cross-sectional price comparisons, in light of the high variability in service mix across areas. In measuring price changes, it was found that "chaining" was more important empirically than allowing the relative importance of services to change between years. During the 1985-1989 study period, Medicare payment rates grew, on average, by 3.5% annually. This rate varied across both time and types of services as a result of differential fee updates and explicit pricing policies implemented by Medicare (e.g., reductions in payments for "overvalued" procedures). Cross-sectionally, our results show that 1988 fees in the highest-priced areas were more than 1.5 times those in the lowest-priced areas.