Relative Prices, Payer Mix and Regional Variations in Medical Care

The use of medical services and Medicare spending vary substantially across geographic regions of the United States, as documented by Dartmouth Atlas researchers over the past four decades. We measure the extent to which regional variations in Medicare spending on physician services is due to regional variations in the differences in Medicare’s fees to physicians relative to private insurers’ fees for the same services. Specifically, the stepwise demand model predicts that Medicare’s relative profitability alone can explain regional variations in Medicare spending as physicians alter their prices to privately insured patients to achieve an optimal payer mix. We apply the stepwise demand model to evaluate how Medicare’s physician prices relative to private insurers’ affect Medicare spending and the quantity and mix of services provided, regional variations in Medicare spending, private insurers’ prices and spending, and Medicare patients’ access and quality. We link Medicare physician claims data to private insurers’ claims across the US for 2004-2010. We exploit imperfections in changes in Medicare’s physician fee schedule to identify the effects of Medicare’s relative profitability. The results show that on average, a 10% increase in Medicare payment yields a 4.6% increase in private prices and a 1.5% increase in the supply of that service to Medicare patients. We also find that substantial heterogeneity in these relationships exists across service types. Differences in relative profitability explain 15% of the variations in Medicare physician spending across hospital referral regions in 2010. Ongoing research is evaluating how these changes affect private volumes and spending and Medicare quality and access.