In order to inform our empirical estimation, the Lewin Group has explored the health and labor economics literature to understand the nature and the size of the impact of any financial incentives on the labor supply behavior of PCPs and the resultant impact on the availability of primary care services. The main objective of this review is to document the prior empirical evidence of the impact of financial incentives on raising the supply of primary care workforce, the volume of services, impact on medical graduates’ propensity to participate in primary care, PCPs’ retirement decision, etc. This review also evaluates the past evidence on the effect of bonuses shortage areas and their effectiveness in redistributing and retaining primary care workforce. Finally, the review of the literature also focuses on the state-specific experiences with changes in their respective Medicaid payment rates for primary care and the resultant impact on the supply of PCPs, their rate of acceptance of Medicaid patients and the volume of primary care services such as office visits or visits for E&M services.
Affecting the choice of specialty by a medical student is one way by which the supply of primary care services may be increased. Several studies (e.g., Nicholson, 2002; Sivey and Scott, 2012) find that the propensity of medical graduates choosing primary care as their specialty would go up by 9.5-10 percent in response to a 10 percent increase in their earnings (i.e., earnings elasticity of 0.95-1.0). Thus even if bonus payments have the potential to influence the inflow of medical students into primary care, the magnitude of that impact would depend largely on the size of actual bonus payments relative to PCPs’ earnings and how long such payments are in place. These two factors will determine the contribution of the Medicare bonus to the life-time earnings of primary care providers.
Another way to affect the supply of primary care services is to provide financial incentives for existing providers with the aim of increasing their labor supply. Past research (e.g., Rizzo and Blumenthal, 1994; Baltagi et al., 2005) estimates that a 10 percent increase in wage earnings would yield a 2.3 ̶3 percent increase in their annual work hours. This low wage elasticity suggests that influencing the supply of primary care labor with direct fee increases alone is likely to be costly. The increased fee payments will also likely have an effect on the volume of primary care services. However, compared to the wage elasticity, the change in volume of services in response to fee increases is relatively low. Empirical evidence from the literature (e.g., Hadley et al., 2009; Reschovsky et al., 2012) suggests that a 10 percent change in Medicare fees would change the volume of office visits or E&M related visits by 1.8 to 8.8 percent in the same direction.
The numerical estimates of the effect of financial incentives in underserved areas on the choice of practice location of physicians in the US are relatively scarce. An important study based on Canadian data finds that on average, a 10 percent increase in the general practitioner (GP) fees for medical services in a region increases the propensity of a beginning GP to work in this region by 7 percent (Bolduc et al., 1996). Thus the implied elasticity of location choice probability with respect to fee increases is about 0.7. Several studies highlight the role of bonuses in improving the payments and the supply of primary care services in HPSAs in the US. However, estimating the true contribution of bonuses in underserved areas in boosting physicians’ earnings would require additional research.
Past research on state-specific increases in Medicaid and their resultant impact is relatively sparse. However, several studies find a positive correlation between the Medicaid reimbursement rate and acceptance rate of Medicaid patients among PCPs. Cunningham (2011) finds that the effect of increase in Medicaid reimbursement rate on the propensity of accepting primary care patients is positive but small in magnitude. Coburn et al. (1999) finds positive impact of Medicaid fee changes on physician participation and enrollee access in Maine and Michigan; while Bindman et al. (2003) did not find significant effect of Medicaid fee increase on the participation rate of primary care physicians in California.
Despite several empirical results regarding the potential magnitude of the effect of different financial incentives, the estimated effect of Medicare bonuses or improvement in Medicaid reimbursement rates under ACA may not be substantial. This is primarily due to the size and the temporary nature of these positive earnings shocks. The empirical evidence on the effect of this type of short-term pay increase is almost non-existent in the literature. However, the ranges of the effects of long-term earnings shocks from our review of the literature can inform policy makers about the likely magnitude of the impacts of these income-augmenting policies for PCPs if they are sustained for a longer duration.