Price Controls and Medicare Spending: Assessing the Volume Offset Assumption

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Abstract
This study provides new estimates of the "volume offset" that may occur when payment rates for Medicare physician services are changed. Currently, policy makers assume that 50 percent of all payment rate decreases are offset by volume increase and that this occurs uniformly across all types of services. Using data from 1986 through 1992 and time-series, cross-sectional regression analysis, the authors show that although volume growth does offset reductions in fees, the effect is generally smaller than 50 percent and varies considerably by type of service and specialty. For imaging and evaluation and management services an offset of about 25 percent, and for tests an offset of about 15 percent, would seem more appropriate; for procedures, the current 50 percent offset is consistent with this study's results. In addition, this analysis suggests that the offset should be considered as a response to fee increases as well as decreases.

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