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The Anatomy of Physician Payments: Contracting Subject to Complexity

Author

Listed:
  • Jeffrey Clemens
  • Joshua D. Gottlieb
  • Tímea Laura Molnár

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.

Suggested Citation

  • Jeffrey Clemens & Joshua D. Gottlieb & Tímea Laura Molnár, 2015. "The Anatomy of Physician Payments: Contracting Subject to Complexity," NBER Working Papers 21642, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21642
    Note: AG HC ME PE
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    References listed on IDEAS

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    1. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    2. Jeffrey Clemens & Joshua D. Gottlieb, 2014. "Do Physicians' Financial Incentives Affect Medical Treatment and Patient Health?," American Economic Review, American Economic Association, vol. 104(4), pages 1320-1349, April.
    3. Samuel Kleiner & William White & Sean Lyons, 2015. "Market power and provider consolidation in physician markets," International Journal of Health Economics and Management, Springer, vol. 15(1), pages 99-126, March.
    4. Jeffrey Clemens & Joshua D. Gottlieb, 2017. "In the Shadow of a Giant: Medicare’s Influence on Private Physician Payments," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 1-39.
    5. Clemens, Jeffrey & Gottlieb, Joshua D. & Shapiro, Adam Hale, 2014. "How much do Medicare cuts reduce inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
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    Cited by:

    1. Laurence Baker & M. Kate Bundorf & Aileen Devlin & Daniel P. Kessler, 2016. "Why Don’t Commercial Health Plans Use Prospective Payment?," NBER Working Papers 22709, National Bureau of Economic Research, Inc.
    2. Liran Einav & Amy Finkelstein & Maria Polyakova, 2016. "Private Provision of Social Insurance: Drug-specific Price Elasticities and Cost Sharing in Medicare Part D," NBER Working Papers 22277, National Bureau of Economic Research, Inc.
    3. Clemens, Jeffrey & Gottlieb, Joshua D. & Shapiro, Adam Hale, 2016. "Medicare payment cuts continue to restrain inflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    4. repec:aea:aejpol:v:9:y:2017:i:2:p:28-56 is not listed on IDEAS
    5. Benedic N. Ippolito, 2016. "Financial incentives, hospital care, and health outcomes: Evidence from fair pricing laws," AEI Economics Working Papers 863745, American Enterprise Institute.
    6. Jeffrey Clemens & Benedic Ippolito, 2017. "Uncompensated Care and the Collapse of Hospital Payment Regulation: An Illustration of the Tinbergen Rule," NBER Working Papers 23758, National Bureau of Economic Research, Inc.
    7. Zack Cooper & Fiona Scott Morton & Nathan Shekita, 2017. "Surprise! Out-of-Network Billing for Emergency Care in the United States," NBER Working Papers 23623, National Bureau of Economic Research, Inc.
    8. Zack Cooper & Fiona Scott Morton & Nathan Shekita, 2017. "Surprise! Out-of-Network Billing for Emergency Care in the United States," CEP Discussion Papers dp1524, Centre for Economic Performance, LSE.
    9. Cooper, Zack & Scott Morton, Fiona & Shekita, Nathan, 2017. "Surprise! Out-of-network billing for emergency care in the United States," LSE Research Online Documents on Economics 86621, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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