Do Physicians Warm Up to Higher Medicare Prices? Evidence From Alaska

Designing and implementing incentives for efficient care delivery remain a pervasive challenge within the US health care system. Relatedly, the Medicare program, which is currently home to over 50 million beneficiaries, accounts for almost $600 billion in annual federal outlays. In this way, the program is both a significant source of health spending and potential influence over health care providers.

At the same time, the process behind Medicare payment revisions is not driven by market forces. Physicians, for example, have considerable influence over constructing their own payment levels, which risks regulatory capture and inefficient resource allocations. The law-making process itself can generate substantive changes to Medicare pricing as well, even through legislation that is only indirectly related. Congressional representatives can simply exploit their appropriations authority in order to devote more public resources to the health care industry within their representative districts or states. Yet, the ultimate impacts of such politically driven price shocks are a priori ambiguous.

Our empirics leverage policy induced positive price changes for Alaskan physicians during the mid- and late-2000s. Besides localizing to Alaska, these payment changes are unique across several aspects. First, the price adjustments are relatively recent events, as opposed to changes from decades earlier which dominate the literature. Second, the relative changes are strikingly large. The first price shock translates to a 50% increase in physician service payments for care delivered to Medicare beneficiaries, while the second change is roughly a 25% increase over pre-policy levels. Third, we benefit from observing a temporary adjustment to Medicare physician payments as well as a persistent change to reimbursement levels. The upshot is that these contrasting incentive structures allow us to better understand the importance of ephemeral versus indefinite changes to Medicare payment generosity across a variety of physician and medical care types, which is rare in the literature. Thus, we believe these are a unique combination of Medicare incentive characteristics facing physicians.

Using Medicare claims data from 2002-2013 and the standard difference-in-differences research design, our current findings suggest that the plurality of physicians are not influenced by temporary Medicare price fluctuations, even when the changes are large. If many physicians are indeed inframarginal, then this style of incentive change operates largely as an unconditional financial transfer from taxpayers to physicians. Permanently higher Medicare prices seem to induce greater service flows to the Medicare market in Alaska; however, the adjustments typically materialize with a substantive lag. In supplementary analyses using other data, we do find suggestive evidence of increased housing consumption by Alaskan physicians during periods of greater Medicare revenue.

Our setting and empirics underscore the need for greater attention to and ultimately restraint in politically driven allocations of federal health care dollars—for which some state representatives appear particularly adept. In an era of unrelenting health care spending growth and looming US fiscal challenges, it may become unaffordable to simply look past it as business as usual in Washington.