Volume and Intensity of Medicare Physicians' Services: An Overview

By Kay, Terrence L. | Health Care Financing Review, Summer 1990 | Go to article overview

Volume and Intensity of Medicare Physicians' Services: An Overview


Kay, Terrence L., Health Care Financing Review


Volume and intensity of Medicare physicians' services: An overview

Introduction

During the past several years, Congress, the Administration, beneficiary representatives, and others have directed considerable attention to Federal spending for physicians' services covered by the Medicare Part B program. Medicare expenditures for physicians' services during fiscal year 1990 are expected to exceed $25 billion. Expenditures for physicians' services are the second largest component (after hospital expenditures) of Medicare spending and the third largest Federal domestic program. Actuaries at the Health Care Financing Administration (HCFA) estimate that, over the 10-year period 1978-87, Medicare expenditures for physicians' services increased at an annual compound rate of 16 percent.

Much of this increased spending is thought to result from factors related to increased volume and intensity of physicians' services, because the rate of increase far exceeds the combined effect of the general inflation rate and increases in the number of beneficiaries. For example, HCFA actuaries estimate that about 15 percent of the increase in spending for physicians' services during 1978-87 was caused by an increase in the number of beneficiaries (about 2 percent a year). About 40 percent was caused by increases in payments per service, which are largely the result of adjustments for inflation. About 45 percent of the growth resulted from residual factors, including growth in the number of services for enrollee (growth resulting from new services and technology) and shifts from less expensive to more expensive services (greater intensity).

Background

Forces behind volume-intensity growth

Volume-intensity (VI) includes all factors contributing to increases in expenditures for physicians' services other than increases in payments for individual services and in the covered population. A number of related factors that drive VI growth can be identified. They include payment incentives, technology, physician willingness to provide services, and factors related to beneficiary demand for services. Following are summaries of the issues related to these factors.

Payment incentives

The VI of physicians' services is partly affected by the way that physicians are paid for their services (Pauly, 1970; Manning et al., 1988; Hemenway et al., 1990). Medicare pays for most services through traditional fee-for-service arrangements, in which a separate payment is made for each service rendered by the physician. Clearly, this arrangement provides few incentives for efficiency and may actually encourage the overprovision of services. Further, physicians currently have considerable discretion as to how they define and report services. They might assign more remunerative codes to services for which they formerly assigned less remunerative codes (upcoding), or they might bill separately for services for which they formerly billed under a single code (unbundling). In addition, the current payment system contains no incentives to encourage physicians to reduce charges for procedures to reflect technological improvements, increased experience, and other factors that might lower production costs.

Technology

Technological advances have contributed to VI growth because new services and treatment methods have emerged. Although many technical advances in health care benefit patients, they also may increase costs in several ways:

* The development of new technologies is often accompanied by the need for additional services. For example, transplants require immunosuppressive drugs, and end stage renal disease treatment requires supplies.

* A new service designed to replace an established service may be more expensive than the older one.

* As new technology diffuses, it may be used additively rather than as a substitute for the older technology (e.

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