Controlling for state fixed effects and other factors, this paper estimates the effect of the generosity of Medicaid physician payment levels on the volume and site of ambulatory care received by Medicaid patients compared to privately insured patients. Results indicate that cuts in Medicaid physician fees lead to statistically significant reductions in the number of visits for Medicaid patients compared to privately insured patients. Cuts in fees also lead to a statistically significant shift away from physician offices and toward hospital emergency departments and especially outpatient departments. Primary diagnoses for which site of care shifts are most pronounced include hypertension, asthma, urinary tract infections, and diabetes.
In 2003, Medicaid provided health insurance coverage to 39 million children and adults in low-income families, in addition to assisting 8 million low-income people with disabilities and 7 million elderly and disabled Medicare beneficiaries (Rowland 200512006). States have wide latitude in setting provider payment rates for Medicaid recipients not on Medicare, and provider payment levels vary greatly by state. Medicaid prohibits cost sharing on services for children and allows only nominal cost-sharing amounts for adults. Thus, other than time costs for Medicaid patients, a binding constraint on the amount of care that Medicaid patients receive is likely to be physicians' decisions about whether to treat them--a decision influenced by the fees a state offers a physician for treating a Medicaid patient.
Physicians facing reduced Medicaid fees are likely to reduce the quantity or intensity of services supplied to Medicaid patients (Gruber, Kim, and Mayzlin 1999; McGuire and Pauly 1991). Previous research generally has found a positive correlation between state Medicaid fees and the fraction of private physicians who treat Medicaid patients, though the evidence is mixed, with some studies estimating a small effect (Decker 1993, 2007; Sloan, Mitchell, and Cromwell 1978), some a large effect (Hadley 1979; Showalter 1997), and some no effect at all (Coburn, Long, and Marquis 1999; Zuckerman et al. 2004). If cutting fees does reduce the number of physicians willing to accept Medicaid patients, this may reduce the quantity of care Medicaid patients receive or lead them to seek care in hospital emergency departments or other sites. Previous evidence using data from the 1980s suggests that lower Medicaid physician fees do not affect the total number of times that a Medicaid patient visits a physician, but do affect the share of physician visits that take place in a private physician's office (as opposed to an emergency room or other hospital setting) (Baker and Royalty 2000; Cohen 1993; Long, Settle, and Stuart 1986).
Despite the fact that many states continue to cut or freeze fees in the event of fiscal downturns, little work has examined the effects of Medicaid physician fees using newer data; additionally, most past work has failed to control for a possible correlation between state-level measures of Medicaid payment generosity and other state-level attributes that affect use of health care services. This paper tests whether a state's level of Medicaid physician payment affects the volume of visits or site of care for Medicaid patients, compared to privately insured patients. By comparing the treatment of Medicaid patients to that of privately insured patients and by using state fixed effects, Medicaid's effect on the use of health care services is separated from any correlation between the Medicaid fee and other attributes of the state in which a patient lives.
Methods and Data
Data on Medicaid Physician Fees
Since the late 1980s, the fraction of the Medicaid caseload in Medicaid managed care organizations has risen steeply, though many states that have moved to Medicaid managed care have not chosen capitation. These states instead rely on primary care case managers that often continue to be paid on a fee-for-service basis. …