The effect of earnings on the volume of primary care services is related to the previous questions but is a distinct issue that incorporates the ability of providers to impact the demand for services as a result of changes in their income. Dummit (2008) argues that, as the largest single payer, Medicare affects physician practice revenues directly through its payments and indirectly through its fee schedule, which many private payers use. Lower compensation for primary care physicians is one of the reasons that these specialties are less desirable. Reschovsky et al. (2012) report that over the past decade, Medicare fees and spending for specialist services (such as diagnostic tests and procedures) have gone up more rapidly than fees for E&M services, which primary care providers (PCPs) typically provide. Those higher payments have contributed to faster growth in specialist services than in E&M patient visits. Commercial insurers and state Medicaid plans often build their fee schedules on Medicare’s, further widening the income gap between PCPs and other physician specialists, and contributing to the shrinking number of medical students choosing to enter primary care. In this section we review how improvements in Medicare fees can influence the volume of health care services provided under Medicare.
Hadley et al. (2009) estimate the relationship between Medicare fees and the volume of eight specific services provided by physicians using data for 13,000 physicians from 2000-2001 and 2004-2005 Community Tracking Study Physicians Surveys. Since the fee schedule is one of the few policy tools that Medicare potentially has available to influence service volume, it is critical to have a better understanding of how changes in Medicare fees affect Medicare service volume. Their study finds that a 10 percent reduction in Medicare fees leads to 1.8 percent to 6.6 percent reduction in the volume of office visits (of various degrees of complexity). They argue that physicians may be more likely to respond to fee cuts by limiting their acceptance of new Medicare patients, rather than limiting visits by established patients.
Clemens and Gottlieb (2014) examine the changes in physicians’ reimbursement rates under Medicare before and after year 1997 when consolidation of geographic regions across which Medicare adjusts physician payments led to area specific price shocks. The study measures health care supply of all services using RVU. They find that health care supplied to Medicare patients (RVUs per patient) exhibits a relatively large long run elasticity of around 1.5 with respect to reimbursement rates. Their results are mostly driven by the stronger positive elasticity among elective procedures (e.g., eye and orthopedic procedures). When restricted to the analysis of the supply of E&M services their estimates lack precision and they find statistically insignificant short (1997-98) and long run (2001 to 2005) impact of the price shock on the supply of E&M services. However, the medium run (1999 and 2000) elasticity is precisely estimated to be 0.97 for E&M. They argue that the observed responses imply that the overall composition of services shifts toward more elective procedures as reimbursement rates increase. Finally, the number of patients and physicians per patient are almost unaffected by the change in the reimbursement rates.
Reschovsky et al. (2012) simulate the effect of a permanent 10 percent fee increase for primary care E&M services under Medicare. Their estimated primary care supply model suggests that higher primary care fees lead to increases in both the likelihood that PCPs will treat Medicare beneficiaries and, more importantly, the quantity of E&M services PCPs provide to Medicare patients. According to their analysis higher fees (10 percent increase permanently) for primary care beginning in 2011 raise the primary care E&M visits by 8.8 percent.
Thus, the likely range of changes in the volume of primary care visits in response to a long-term increase in Medicare primary care fees appears to be wide. Based on Hadley et al. (2009) and Reschovsky et al. (2012), a 10 percent increase in Medicare fees for primary care can potentially increase the volume of primary care visits in the range of 1.8 percent to 8.8 percent. However, due to the short-term nature of the Medicare PCIP (only 5 years) the observed impact of the incentive payment on the volume of E&M visits may be closer to the lower bound.