Working Paper: NBER ID: w21642
Authors: Jeffrey Clemens; Joshua D. Gottlieb; Tmea Laura Molnar
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.
Keywords: physician payments; Medicare; private insurers; healthcare contracting
JEL Codes: H44; H51; H57; I11; I13; L98
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Medicare's relative prices (H51) | BCBS payments (I13) |
| Share of services benchmarked to Medicare (I11) | BCBS payments (I13) |
| Size of physician groups (I11) | Link to Medicare pricing (H51) |
| BCBS deviation from Medicare rates (I18) | Adjustments based on marginal costs (D21) |
| Payments to smaller firms (L25) | Link to Medicare (I18) |
| Payments to larger firms (G32) | Weaker connection to Medicare (I18) |