Trading Spaces: Medicare's Regulatory Spillovers on Treatment Setting for Non-Medicare Patients

At this time, the Medicare public insurance program includes over 50 million enrollees and directs 20% of the United States’ health care spending. Health care providers are therefore likely to closely monitor and respond to prevailing incentive structures in the Medicare program, with potential impacts on medical care delivery for other (non-Medicare) payers and patients. Understanding such externalities is important for formulating optimal Medicare policy and for forecasting the potential supply-side financial winners and losers from a given policy change.

Prior economic research has documented Medicare spillover effects on price negotiations of private insurers and on physicians’ behavior toward non-Medicare populations. What is less well-studied is how Medicare’s non-price regulatory decisions impact the behavior and financial outcomes of market participants beyond their Medicare line of business.

To shed new light in this area, we exploit a Medicare-wide regulatory decision that allows laparoscopic cholecystectomy (‘lap chole’) surgical procedures to be performed within ambulatory surgery centers (ASCs) for the first time in 2008. Prior to this, Medicare would only pay for lap chole surgeries administered within a hospital outpatient or inpatient department—effectively prohibiting Medicare cases within ASC settings. We ask whether a Medicare change to the permitted service delivery setting impacts surgeons’ choice of setting for non-Medicare procedures. Specifically, we investigate whether lifting the Medicare prohibition on ASC delivery for lap chole procedures increases surgeons’ propensity to split commercial (i.e., non-Medicare privately insured) lap chole cases between ASCs and HOPDs. We use the universe of ambulatory procedure discharge records from Florida (2005-2011), which allow us to observe complete physician-level panels of treatment output and choice of facility setting across payers.

We employ a variety of difference-in-differences and event study analyses to recover a causal estimate of the Medicare policy’s spillover effect onto the commercially-insured market. Our preferred estimation strategy reveals a 59% increase in the probability of splitting commercial lap chole procedures following the Medicare rule change.

We additionally find that the spillovers from Medicare seem to extend beyond the specific procedure contained in the regulatory change (lap chole). These supplementary analyses investigate the treatment setting allocations for all other (non-lap chole) outpatient procedures among surgeons newly splitting their commercial lap chole cases after the Medicare ban is lifted. Across various approaches, we consistently find large increases in the shares of all other procedures performed within an ASC by these surgeons among their commercially-insured and traditional Medicare cases. These increases correspond to more than doubling of the pre-policy levels.

Taken together, this Medicare regulatory decision has substantive spillover effects, with negative revenue externalities for hospitals. Although prior policy and research attention has been devoted to Medicare payment disparities between HOPDs and ASCs, non-price regulation can have comparable or perhaps greater ramifications for these firms and patients over the long-run.