Medicare Fees and the Volume of Physicians' Services

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Medicare Fees and the Volume of Physicians' Services: Technical Appendices

This document, published in the Winter 2009/2010 edition of Inquiry (Vol. 46, No. 4), contained the technical appendices supporting the journal article "Medicare Fees and the Volume of Physicians' Services" by Jack Hadley, James D. Reschovsky, Catherine Corey, and Stephen Zuckerman. The article investigated whether changes in Medicare physician payment rates led to compensatory changes in the volume of services that physicians delivered to beneficiaries.

Research Context

A longstanding concern in Medicare policy was whether reducing physician fees prompted doctors to increase service volume to maintain their incomes. This question had enormous implications for Medicare spending projections and physician payment design. If physicians systematically offset fee reductions by performing more services, then across-the-board fee cuts would be a blunt and ineffective tool for controlling program expenditures.

The study employed Medicare Part B claims data linked to physician-level data from the American Medical Association's Physician Masterfile. The researchers constructed measures of fee levels, service volume, and total revenue at the physician level and estimated regression models controlling for physician, market, and patient characteristics.

Methodological Details

The technical appendices documented the data sources, variable construction, statistical approaches, and robustness checks used in the analysis. Key methodological challenges included the potential endogeneity of fee levels, since Medicare payment updates were partly influenced by past volume trends. The researchers addressed this through instrumental variables approaches, and the appendices provided detailed results of specification tests and sensitivity analyses.

The appendices also described how the researchers accounted for differences across physician specialties, geographic areas, and practice settings. The analysis distinguished between procedural and evaluation-and-management services, since the volume response to fee changes was expected to differ across service types.

Key Findings and Policy Relevance

The main article found evidence of a modest volume response to fee changes. When Medicare reduced fees, physicians tended to increase service volume, partially offsetting the revenue impact. The effect varied across specialties, with some groups showing stronger responses than others. These findings were directly relevant to the ongoing debate over the Medicare Sustainable Growth Rate formula, which set annual spending targets and triggered automatic fee cuts when spending exceeded the target.

Understanding the fee-volume relationship informed the design of alternative payment models such as bundled payments and accountable care organizations, which aimed to align physician incentives with cost and quality goals rather than relying on blunt fee adjustments. The research contributed to the academic and policy debates that eventually led to the repeal of the Sustainable Growth Rate formula through the Medicare Access and CHIP Reauthorization Act of 2015.

Sources and Further Reading

Centers for Medicare and Medicaid Services — Federal health programs administration.

Health Affairs — Peer-reviewed health policy journal.

Robert Wood Johnson Foundation — Health policy research philanthropy.