Estimating Supply Responses from Changes to Medicare's OPPS

Recent attention from policy makers and researchers in health care has focused on prices. How much should doctors or hospitals be paid for their services? What are the consequences of shifting the absolute or relative prices of these services? Here, I estimate the response of hospital-based outpatient services to changes in price, using a 5% Sample of Medicare beneficiary claims. Exploiting the sharp and discontinuous changes in reimbursement for medical care, I find limited evidence that the frequency of outpatient based-medical services responds to changes in prices or reclassification of specific procedures in the outpatient prospective payment system.

Two examples make interesting cases in point. In the first, the re-coding of a limited extremity ultrasound lead to a 33 percent decrease in the reimbursement rate for the procedure on average, with much more modest change in price for related ultrasounds. In spite of this change in prices, there is very little evidence in the favor that health care providers changed the rate of use of this procedure, or related procedures, whose relative prices were similarly changed. Cross-sectional variation in the reimbursement rates received by hospitals, due to geographic variation in Medicare's payment structures, reinforce this point.

Similarly, a change in how Medicare coded outpatient ER visits by hospital type changed the reimbursement rates about a third, or equivalent to one level of intensity. As with ultrasounds, there is little evidence that hospitals changed their billing reports to Medicare local to this change, even while frequency of ER visits, and their reported levels of intensity, changed dramatically

Other changes to the OPPS reimbursement rates are less dramatic than this, but still lend themselves to estimate supply elasticities, using both variation in OPPS reimbursement rates common to all providers, as well as geographic variation tied to Medicare's payment rules.