The Medicare Physician Fee Freeze: What Really Happened?

Abstract

Prologue: Physicians and patients play the key roles in determining the volume of medical services provided by practitioners. Physicians, as agents of their patients, render professional judgments regarding the use of medical services. Professional norms call for the provision of all beneficial services, but physicians paid on a fee-for-service basis have a financial incentive to provide more service (in contrast to doctors paid on a capitated basis, who have a financial incentive to undertreat). As physician practice has come under more intense financial pressure, there is some evidence that physicians have responded to fee constraints by providing additional services. In this paper, Janet Mitchell and her coauthors track trends in Medicare physician spending during the program's recent (1984-1986) freeze on fees for services provided by doctors. By examining all Medicare claims submitted by doctors from four states and extrapolating the data to the experience in all states, the authors found that the program and its beneficiaries were spending 29.5 percent more ($582 versus $450) for physician services by 1986 than was the case three years earlier; despite the fee freeze. The major spending increases were for surgery and diagnostic tests. Mitchell, who holds a doctorate in social welfare from Brandeis University, is president of the Center for Health Economics Research, a Boston-area based nonprofit research organization that (with its sister organization, the for-profit Health Economics Research, Inc.) is devoted exclusively to the study of public-sector health financing issues, jerry Cromwell, who holds a doctorate in economics from Harvard University, is president of Health Economics Research, Inc. The two organizations derive virtually all of their revenues from federal grants and contracts with the Health Care Financing Administration and other federal entities. Gerard Wedig also holds a doctorate in economics from Harvard. Before assuming his current position as assistant professor of health care systems at the Wharton School in Philadelphia, he was a senior economist at the Center for Health Economics Research.

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