Screening Through Soft Spending Limits: Evidence from the Medicare Therapy Cap

Governments and firms often use soft spending limits to curb overspending while allowing exceptions. We study a Medicare policy that capped per-patient physical therapy spending with exceptions for documented medical need. By screening out low-value care, the cap reduced spending by 8 percent without harming patient health. This screening was driven by Medicare’s exception decisions, whereas patients and providers scaled back care indiscriminately. However, the cap also generated horizontal inequities: conditional on need, lower-income and minority patients were more likely to be screened out because they were treated by smaller providers who were slower to adapt to new documentation requirements.