The Extent of Externalities from Medicare Payment Policy

Medicare accounts for roughly 20 percent of medical expenditures in the United States and is the dominant payer for many treatments. Consequently, Medicare payment policy may have diffuse consequences. Using a contemporary bundled payment reform (the “CJR” program) and a difference-in-differences research design, we estimate Medicare’s spillover reach. We find that altered treatment decisions for targeted joint replacement procedures are closely, though not perfectly, mirrored between traditional Medicare, Medicare Advantage, and the nonelderly commercially insured populations. Results for untargeted procedures performed by CJR-affected physicians also show suggestive evidence consistent with a secondary spillover effect; however, this behavior change does not extend to less related procedures. Our findings align with the “norms hypothesis” for physician decision making but do not imply rigid and uniform treatment choices. Instead, key decision nodes appear to gain greater salience under Medicare’s new incentive structure, which leads to revised treatment choices for different payer-procedure combinations. Ignoring the breadth of externalities from Medicare policies risks understating their social welfare impact.