Primary Care Is the New Specialist

This paper analyzes the demand and supply market of physicians under a standardized fee-for-service system. It provides evidence for a supply-induced demand mechanism that is compatible with the increasing trend in healthcare spending in the US. Using data on the Medicare universe of physicians (therefore excluding hospitals) and the BLP (1995) algorithm, controlling for demographic and regional variation, I analyze physicians’ response to financial incentives and how they can impact demand by carrying out more lucrative treatments. This research estimates a degree of overutilization of specialized (more remunerative) procedures equal to 8-18% across all specialties and urbanity levels. It also finds that primary care physicians are able to take on more specialist services in less urban areas, where they gain higher market shares due to the lower number of specialists in close proximity. In particular, the increase in the weight of the primary care physicians' financial interests in the consumer utility ranges between 7-16% compared to physicians in large metropolitan areas, at the expense of specialists. Small metropolitan areas (population>50,000) and very rural areas (population<10,000) are the most affected. This paper also shows from a reduced-form perspective that primary care doctors react strongly to increases in the reimbursement units. An increase of one unit in the reimbursement factor (equal to a salary increase shy of $36) leads to 57 more services provided by primary care in the more remunerative procedure and a 45% higher chance that they will increase the number of specialist services provided. I then analyze the regional decisions of physicians' entry and occupational choice. First, this paper documents the distribution of physicians by skill, specialty, and location. Skill distribution by location is determined by the ranking of the medical school and residency program attended and the current office location. Data analysis documents that physicians earn more rurally than urbanely, both in nominal and in purchasing-power-adjusted wages. The highest paying rural areas do not face a shortage of primary care doctors and the number of primary care physicians per capita has been increasing rurally in the last decade. The combination of high wages and the ability to carry out more specialized and remunerative procedures might attract higher-skilled physicians, who can now be willing to give up urban amenities in favor of a more remunerative job, explaining the increase in the number of doctors rurally. The assessment of the skill level associated with the physicians' choice of specialty and location is an empirical question and a contribution on its own. Second, this paper shows that the financial incentive created by the fee-for-service system has made rural areas more attractive, leading to a much higher entry than before and reducing the physician shortage in those areas. To assess the actual impact of fee-for-service on healthcare costs and to analyze the regional effects of a policy change, this paper uses a general equilibrium setting that combines firm heterogeneity and consumer heterogeneity in a model combining Hotelling and Melitz models into one framework.