The Anatomy of Physician Payments: Contracting Subject to Complexity

Jeffrey Clemens, Joshua Gottlieb and Timea Laura Molnar

No 21642, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Why do private insurers closely link their physician payment rates to the Medicare fee schedule despite its well-known limitations? We ask to what extent this relationship reflects the use of Medicare's relative price menu as a benchmark, in order to reduce transaction costs in a complex pricing environment. We analyze 91 million claims from a large private insurer, which represent $7.8 billion in spending over four years. We estimate that 75 percent of services, accounting for 55 percent of spending, are benchmarked to Medicare's relative prices. The Medicare-benchmarked share is higher for services provided by small physician groups. It is lower for capital-intensive treatment categories, for which Medicare's average-cost reimbursements deviate most from marginal cost. When the insurer deviates from Medicare's relative prices, it adjusts towards the marginal costs of treatment. Our results suggest that providers and private insurers coordinate around Medicare's menu of relative payments for simplicity, but innovate when the value of doing so is likely highest.

JEL-codes: H44 H51 H57 I11 I13 L98 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-hea
Note: AG EH ME PE
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Citations: View citations in EconPapers (11)

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