The Impact of Medicaid Adoption of the Medicare Fee Schedule

John Holahan PhD Martcia Wade PhD Michael Gates BS and Lynn Tsoflias BA

In this article the authors simulate the effects on Federal and State Medicaid exshypenditures of increasing Medicaid fees to Medicare fee schedule (MFS) levels Strict adoption of the M FS by the States would Increase total Medicaid spending by apshyproximately 4 percent $25 to $29 billion Because Medicaid fees vary across States so does the impact of adopting the MFS Medicaid spending would inshycrease significantly in some wealthy States with large Medicaid populations and in a few small relatively poor States Some States currently pay more than the MFS for obstetrical services If these fees continued at higher levels for obstetrical care total Medicaid spending would inshycrease by$35 to $40 billion

BACKGROUND

The levels of fees paid by State Medicshyaid programs to physicians have been a major policy issue for many years It has been well documented that many States particularly States in the East and Midshywest pay fees well below Medicare and private levels (Holahan 1991) A large body of research indicates that low Medshyicaid fees result in low physician particishypation in the program and affect the numshyber of Medicaid patients physicians are

Support for this research was provided by the Health care FIshynancing Administration to The Urban institute through Conshytract Number 500-89-0054 The authors are with The Urban Inshystitute and the opinions expressed are those of the authors and do not reflect the opinions of the Health Care Financing Administration The Urban Institute orlts sponsors

willing to treat It has been somewhat less clear whether these effects reduce overall access for Medicaid beneficiaries to sershyvices that is it appears that care In emershygency rooms outpatient departments and clinics may substitute for reduced acshycess to office-based physicians (Long Settle and Stuart 1986) Nonetheless questions have been raised about whether the lack of access to officeshybased physicians reduces the quality of care and pertlaps increases costs as well

The problem of limited physician particshyipation in Medicaid has become increasshyingly important as Congress has enacted legislation to increase Medicaid coverage of pregnant women and children Legislashytion beginning with the Omnibus Budget Reconciliation Act (OBRA) of 1984 has reshysulted In increases In coverage of pregshynant women and children States are now required to cover pregnant women and inshyfants In families with incomes below 133 percent of the poverty line States are also now required to cover children under the age of eight and to increase coverage by 1 year until all children under the age of 18 are covered by the year 2002 Some obshyservers have argued that expanding Medshyicaid eligibility Is of little value If access to private physicians is limited Thus a numshyber of proposals including that of the Pepper Commission specify that Medicshyaid fees should be raised to levels consisshytent with those paid by the Medicare proshygram(PepperCommisslon 1990)

Health Care Financing ReviewSpring 1993volume 14 Number3

Medicare has recently implemented a major reform of its approach to paying for physician services (Federal Register 1991) The central element of the new phymiddot sician payment reform is a fee schedule based on the resource costs of providing services The result will be increases in Medicare fees for primary care services and reductions In fees for surgery imagmiddot ing and other services The implications are that many Medicaid programs could face rather large increases in fees partiemiddot uiariy for primary care if they are to reach Medicare levels

In this article we provide estimates of the cost to each State of increasing Medmiddot icaid fees to levels under the new MFS We use new information on Medicaid fees obtained from a recent survey as well as fee data from the recently published MFS We also use new estimates of the effects of Medicaid fees on service utiilza lion We estimate the effect on Medicaid expenditures assuming the MFS had been adopted in 1990

One previously published study atmiddot tempted to estimate the increase in costs associated with an increase in Medicaid fees to Medicare levels Using data from 1988 Thorpe Siegel and Dailey (1989) esmiddot timated that increasing Medicaid fees to Medicare payment levels in 1988 would have increased expenditures for physimiddot clan services by $23 billion but demiddot creased expenditures for outpatient emergency room and clinic services by $820 million-a net increase in Medicaid expenditures of $15 billion

These estimates were based on an inmiddot crease in Medicaid fees to Medicare levmiddot eis prior to the fee schedule The Thorpe study relied on Medicaid and Medicare fee data for one fee-a standard physimiddot clan office visit The authors used estimiddot

mates from a study by Long Settle and Stuart (1988) to adjust for the expected inmiddot creases in the use of physician care that would have accompanied the higher Medmiddot icaid fees The Long study used data from the National Health Interview Survey to estimate the relationship between the MedicaidmiddotMedicare fee ratio and the use of ambulatory care services by Medicaid enrollees The study had the following two important results (1) increases in Medicaid fees resulted in no effect on enmiddot roilees overall access to ambulatory care and (2) higher fees Increased usage of officemiddotbased physician services and remiddot duced outpatient emergency room and clinic usage Their estimate of the elasticmiddot lty of private physician utilization with remiddot spec to fees was 03 That is a 1Qpercent increase in fees resulted in a 3-percent inmiddot crease in the use of physician services The results also implied that the increase in physician visits was exactly offset by declines in outpatient emergency room and clinic services

Our results differ from the Thorpe study in two significant ways First we relied on a survey conducted in 1990 of fees for 54 Medicaid procedures We calculated the difference between Medicaid fees for these procedures in each State and Medimiddot care payments under the new fee schedmiddot ule for the same procedures We calcumiddot lated the values of Medicare fees under the fee schedule assuming it had been Introduced in 1990 We used the crossmiddot walk provided in the Federal Register (1991) to convert the fee schedules 1992 procedure codes into 1990 procedure codes Second we used new estimates of utilization responses to physician fee changes that relied on a large sample of Medicaid beneficiaries using 1988 Tapemiddot

Health Care Financing ReviewSpring 1993Jvolume 14 NumberS 12

to-Tape data from Michigan Georgia and Tennessee (Wade 1992) These estimates of changes In utilization covered a wide range of services eg hospital admlsmiddot slons surgeries and ancillary services

The main results of this research are that strict adoption of the MFS would lead to increases in Medicaid spending of $25-$29 billion (39 percent and 44 permiddot cent respectively) depending on the immiddot pact of the fee increase on volume If States adopted the MFS with variations the costs would be different For exammiddot pie Medicaid obstetrical fees are higher than the Medicare fee schedule amounts In all but 16 States If States keep their obshystetrical fees above Medicare levels to enmiddot courage access to obstetrical care for Medicaid beneficiaries the costs would increase by an additional $10 billion On the other hand If Medicaid programs are required to pay only 90 percent of the MFS Medicaid expenditures would only increase by $18-$20 billion (28 percent and 31 percent respectively)

All these estimated Increases are larger than the Thorpe estimates for three reamiddot sons First our estimates are based on 1990 data Medicaid expenditures inshycreased by approximately 20 percent from 1988 to 1990 Thus our expenditureshyincrease estimates are relative to a signlfimiddot cantly larger base Second Thorpe estimiddot mated the effects of increasing Medicaid fees relative to Medicare under the previmiddot ous Medicare payment system The MFS will significantly increase fees for most primary care services Medicaid fees for these services have tended to be low relamiddot live to other services Because primary care services are so Important in the Medmiddot icald market basket adopting the MFS would have a substantial effect in most States The reductions in most surgery

fees by Medicare would have less of an impact because there would be less of a change in Medicaid fees for these sermiddot vices and because surgical procedures are of less importance to Medicaid pashytients Third we used evidence that there would in fact be a positive behavioral reshysponse to a Medicaid fee increase The behavioral response evidence Indicates that increasing Medicaid fees would have a positive effect on access to most physlmiddot clan services hospital outpatient care and prescription drugs There is also evimiddot dence of an offsetting effect of declining Inpatient surgery and hospital days for children Because the evidence Indicates that the net effect of increasing Medicaid fees would be to increase access and utimiddot lization we estimate that the cost of the Medicaid fee increase would be higher than previous studies have estimated

METHODS

Our analysis relied on data from a new survey of Medicaid physician fees (Holahan 1991) The survey collected fee information from all States for fiscal year 1990 on 54 different physician services We attempted to collect fee data on sermiddot vices that are representative of the mal1ltet baskets consumed by different types of Medicaid recipients-infants young chi Imiddot dren women in their childbearing years older male and female adults and the disabled The large number of services included in our survey permitted us to deshyvelop comparisons among Medicaid Medicare and private payers for different

A list of the procedures is available upon request from the aumiddot thO- 2fhe survey procedures accounted for more than one-half the expenditures for Infants individuals under the age of 19 and the disabled The procedures are somewhat less representashytive for oldermales and females

Heallh Care Financing RevklwiSprlng 1993volume 1bull Number 3 13

population groups and for different types of services such as primary care hospital visits obstetrical care surgery laboratory tests and Imaging Medicaid fees were compared with both Medicare-allowed and Medicare-prevailing charges (using data from the Part B Medicare Annual Data procedure and prevailing charge files) and with private payers (using data from the Health Insurance Association of America) Expenditure weights derived from Medicaid claims in the Health Care Financing Administration (HCFA) Tape-to-Tape data were used to create fee indexes that account for the relative difshyferences across procedures Data for the 54 survey procedures from California Georgia Michigan and Tennessee were used to compute the weights

The dominant finding of the analysis Is extreme variation across the country in how well Medicaid programs pay for physhysician services Some States pay exshytremely well by the standards of Medicare and even private payers Others pay very poorly The results are shown In Table 1 Medicaid fees after adjusting for the cost of physicians practice (column 2) vary by a factor of more than 3 Many of the States with relatively high physician fees are smaller States in the South and West many of the States with low fee policies are large industrialized States We found that on average Medicaid fees for surshygery services obstetrical care and imagshyIng tend to be higher than for office visits and laboratory tests relative to Medicare and private fees Medicaid fees for surgishycal procedures are high relative to Medishycare fees but relatively low compared with private fees This is probably beshycause Medicare In recent years has limshyited the rates of growth in Medicare surgishycal fees

Estimating the impact of a fee increase on Medicaid expenditures requires knowledge of the effect of fee increases on access and utilization The literature indicates that Medicaid enrollees utilizashytion of services is related to Medicaid fee levels (Long Settle and Stuart 1986 Cohen 1989 and 1991) We use Wades (1992) estimated models of Medicaid sershyvice utilization to account for the effects of fee levels on service utilization

Wade estimates a linear model of sershyvices per enrollee The models indepenshydent variables are the weighted average ratio of 1988 Medicaid fees to private charges per capita Income the ratio of Medicaid enrollees to total population the number of primary care physicians per capita the number of hospital beds per capita occupancy rates the proporshytion of teaching beds and the proportion of public beds The model also controls for enrollees age sex race enrollment category length of enrollment and whether the enrollee is In a fee-for-service managed care program The analysis also controls for enrollees State of residence and whether the enrollees county of resishydence Is urban or rural The State indicashytor variables control for numerous facshytors including State Medicaid policies

The model is estimated for several cateshygories of service physlcan office visits clinic visits hospital outpatient departshyment visits hospital inpatient services surgical procedures prescription drug use and radiology and laboratory sershyvices The models are estimated sepashyrately for non-institutionalized children and adults excluding the blind the disshyabled and the elderly

The analysis of enrollee utilization uses data for Georgia Michigan and Tennesshysee extracted from HCFAs 1988 Tape-to-

Health Care FIIUincing ReviewSpring 1993Volume 14 Number 3 14

Table 1 Variation In Average Medicaid Fees All Services by State United States Fiscal Year 1990

Ratio of State Medicaid Maximum Fees to National Average Medicaid

Fees Adjusted for

Cost ot Ratio of Medicaid Maximum Fees to

Medicare Medicare

State Physician

Unadjusted Practtce1 Allowed Prevailing Private Charges Charges Fees

All 100 100 085 074 065

Alabama 114 123 oao 071 064 Alaska 135 097 114 099 094 Arkansas 098 114 117 105 oao California 104 085 059 052 049 ColOrado 109 107 094 084 064 Connecticut 106 095 065 054 045 Delaware 073 066 074 065 052 District of Columbia 114 091 062 055 044 Florida 117 115 086 073 066 Georgia 159 172 112 096 083 Hawaii 092 084 062 073 063 Idaho 137 146 086 084 078 Illinois 082 072 086 055 055 Indiana 117 122 125 107 100 Iowa 106 113 102 096 077 Kansas 097 105 085 074 065 Kentucky 092 099 083 071 069 Louisiana 111 114 105 095 085 Maine 090 101 069 059 059 Maryland 107 093 059 046 054 Massachusetts 149 137 098 085 070 Michigan 084 055 071 066 059 Minnesota 102 101 104 088 071 Mississippi 074 084 074 069 056 Missouri 067 070 068 056 049 Montana 089 098 089 073 064 Nebraska 099 113 113 100 096 Nevada 148 129 087 073 076 New Hampshire 111 118 081 073 061 New Jersey 059 050 047 040 033 New Mexico 065 067 086 074 059 New York 103 085 032 029 029 North Carolina 109 122 092 078 068 North Dakota 085 093 089 079 068 Ohio 064 084 065 054 058 Oklahoma 100 110 086 076 068 Oregon 110 110 079 072 059 Pennsylvania 056 054 061 053 046 South Carolina 097 108 100 085 076 South Dakota 087 102 110 091 076 Tennessee 097 107 107 093 081 Texas 125 115 107 095 088 Utah 083 084 101 085 067 Vermont 098 113 073 oao 057 Virginia 127 128 109 095 071 Washington 096 089 075 067 057 West Virginia 074 081 041 034 036 Wisconsin 085 087 081 069 062 Wyoming 112 115 125 102 084 1Thls deflation Is based on the Geographic Practice Cost tnlttex using the full value of physicians work

SOURCE Urban inslltute tabulallons of Urban Institute Survey of Medicaid Physician Fees Heslth Insurance Association of Americas Prevailing Healthcare Charges System and Part B Medicare Annual Data

Health Care Financing RevftiSpring 1993votume 14 Number 3 15

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

Medicare has recently implemented a major reform of its approach to paying for physician services (Federal Register 1991) The central element of the new phymiddot sician payment reform is a fee schedule based on the resource costs of providing services The result will be increases in Medicare fees for primary care services and reductions In fees for surgery imagmiddot ing and other services The implications are that many Medicaid programs could face rather large increases in fees partiemiddot uiariy for primary care if they are to reach Medicare levels

In this article we provide estimates of the cost to each State of increasing Medmiddot icaid fees to levels under the new MFS We use new information on Medicaid fees obtained from a recent survey as well as fee data from the recently published MFS We also use new estimates of the effects of Medicaid fees on service utiilza lion We estimate the effect on Medicaid expenditures assuming the MFS had been adopted in 1990

One previously published study atmiddot tempted to estimate the increase in costs associated with an increase in Medicaid fees to Medicare levels Using data from 1988 Thorpe Siegel and Dailey (1989) esmiddot timated that increasing Medicaid fees to Medicare payment levels in 1988 would have increased expenditures for physimiddot clan services by $23 billion but demiddot creased expenditures for outpatient emergency room and clinic services by $820 million-a net increase in Medicaid expenditures of $15 billion

These estimates were based on an inmiddot crease in Medicaid fees to Medicare levmiddot eis prior to the fee schedule The Thorpe study relied on Medicaid and Medicare fee data for one fee-a standard physimiddot clan office visit The authors used estimiddot

mates from a study by Long Settle and Stuart (1988) to adjust for the expected inmiddot creases in the use of physician care that would have accompanied the higher Medmiddot icaid fees The Long study used data from the National Health Interview Survey to estimate the relationship between the MedicaidmiddotMedicare fee ratio and the use of ambulatory care services by Medicaid enrollees The study had the following two important results (1) increases in Medicaid fees resulted in no effect on enmiddot roilees overall access to ambulatory care and (2) higher fees Increased usage of officemiddotbased physician services and remiddot duced outpatient emergency room and clinic usage Their estimate of the elasticmiddot lty of private physician utilization with remiddot spec to fees was 03 That is a 1Qpercent increase in fees resulted in a 3-percent inmiddot crease in the use of physician services The results also implied that the increase in physician visits was exactly offset by declines in outpatient emergency room and clinic services

Our results differ from the Thorpe study in two significant ways First we relied on a survey conducted in 1990 of fees for 54 Medicaid procedures We calculated the difference between Medicaid fees for these procedures in each State and Medimiddot care payments under the new fee schedmiddot ule for the same procedures We calcumiddot lated the values of Medicare fees under the fee schedule assuming it had been Introduced in 1990 We used the crossmiddot walk provided in the Federal Register (1991) to convert the fee schedules 1992 procedure codes into 1990 procedure codes Second we used new estimates of utilization responses to physician fee changes that relied on a large sample of Medicaid beneficiaries using 1988 Tapemiddot

Health Care Financing ReviewSpring 1993Jvolume 14 NumberS 12

to-Tape data from Michigan Georgia and Tennessee (Wade 1992) These estimates of changes In utilization covered a wide range of services eg hospital admlsmiddot slons surgeries and ancillary services

The main results of this research are that strict adoption of the MFS would lead to increases in Medicaid spending of $25-$29 billion (39 percent and 44 permiddot cent respectively) depending on the immiddot pact of the fee increase on volume If States adopted the MFS with variations the costs would be different For exammiddot pie Medicaid obstetrical fees are higher than the Medicare fee schedule amounts In all but 16 States If States keep their obshystetrical fees above Medicare levels to enmiddot courage access to obstetrical care for Medicaid beneficiaries the costs would increase by an additional $10 billion On the other hand If Medicaid programs are required to pay only 90 percent of the MFS Medicaid expenditures would only increase by $18-$20 billion (28 percent and 31 percent respectively)

All these estimated Increases are larger than the Thorpe estimates for three reamiddot sons First our estimates are based on 1990 data Medicaid expenditures inshycreased by approximately 20 percent from 1988 to 1990 Thus our expenditureshyincrease estimates are relative to a signlfimiddot cantly larger base Second Thorpe estimiddot mated the effects of increasing Medicaid fees relative to Medicare under the previmiddot ous Medicare payment system The MFS will significantly increase fees for most primary care services Medicaid fees for these services have tended to be low relamiddot live to other services Because primary care services are so Important in the Medmiddot icald market basket adopting the MFS would have a substantial effect in most States The reductions in most surgery

fees by Medicare would have less of an impact because there would be less of a change in Medicaid fees for these sermiddot vices and because surgical procedures are of less importance to Medicaid pashytients Third we used evidence that there would in fact be a positive behavioral reshysponse to a Medicaid fee increase The behavioral response evidence Indicates that increasing Medicaid fees would have a positive effect on access to most physlmiddot clan services hospital outpatient care and prescription drugs There is also evimiddot dence of an offsetting effect of declining Inpatient surgery and hospital days for children Because the evidence Indicates that the net effect of increasing Medicaid fees would be to increase access and utimiddot lization we estimate that the cost of the Medicaid fee increase would be higher than previous studies have estimated

METHODS

Our analysis relied on data from a new survey of Medicaid physician fees (Holahan 1991) The survey collected fee information from all States for fiscal year 1990 on 54 different physician services We attempted to collect fee data on sermiddot vices that are representative of the mal1ltet baskets consumed by different types of Medicaid recipients-infants young chi Imiddot dren women in their childbearing years older male and female adults and the disabled The large number of services included in our survey permitted us to deshyvelop comparisons among Medicaid Medicare and private payers for different

A list of the procedures is available upon request from the aumiddot thO- 2fhe survey procedures accounted for more than one-half the expenditures for Infants individuals under the age of 19 and the disabled The procedures are somewhat less representashytive for oldermales and females

Heallh Care Financing RevklwiSprlng 1993volume 1bull Number 3 13

population groups and for different types of services such as primary care hospital visits obstetrical care surgery laboratory tests and Imaging Medicaid fees were compared with both Medicare-allowed and Medicare-prevailing charges (using data from the Part B Medicare Annual Data procedure and prevailing charge files) and with private payers (using data from the Health Insurance Association of America) Expenditure weights derived from Medicaid claims in the Health Care Financing Administration (HCFA) Tape-to-Tape data were used to create fee indexes that account for the relative difshyferences across procedures Data for the 54 survey procedures from California Georgia Michigan and Tennessee were used to compute the weights

The dominant finding of the analysis Is extreme variation across the country in how well Medicaid programs pay for physhysician services Some States pay exshytremely well by the standards of Medicare and even private payers Others pay very poorly The results are shown In Table 1 Medicaid fees after adjusting for the cost of physicians practice (column 2) vary by a factor of more than 3 Many of the States with relatively high physician fees are smaller States in the South and West many of the States with low fee policies are large industrialized States We found that on average Medicaid fees for surshygery services obstetrical care and imagshyIng tend to be higher than for office visits and laboratory tests relative to Medicare and private fees Medicaid fees for surgishycal procedures are high relative to Medishycare fees but relatively low compared with private fees This is probably beshycause Medicare In recent years has limshyited the rates of growth in Medicare surgishycal fees

Estimating the impact of a fee increase on Medicaid expenditures requires knowledge of the effect of fee increases on access and utilization The literature indicates that Medicaid enrollees utilizashytion of services is related to Medicaid fee levels (Long Settle and Stuart 1986 Cohen 1989 and 1991) We use Wades (1992) estimated models of Medicaid sershyvice utilization to account for the effects of fee levels on service utilization

Wade estimates a linear model of sershyvices per enrollee The models indepenshydent variables are the weighted average ratio of 1988 Medicaid fees to private charges per capita Income the ratio of Medicaid enrollees to total population the number of primary care physicians per capita the number of hospital beds per capita occupancy rates the proporshytion of teaching beds and the proportion of public beds The model also controls for enrollees age sex race enrollment category length of enrollment and whether the enrollee is In a fee-for-service managed care program The analysis also controls for enrollees State of residence and whether the enrollees county of resishydence Is urban or rural The State indicashytor variables control for numerous facshytors including State Medicaid policies

The model is estimated for several cateshygories of service physlcan office visits clinic visits hospital outpatient departshyment visits hospital inpatient services surgical procedures prescription drug use and radiology and laboratory sershyvices The models are estimated sepashyrately for non-institutionalized children and adults excluding the blind the disshyabled and the elderly

The analysis of enrollee utilization uses data for Georgia Michigan and Tennesshysee extracted from HCFAs 1988 Tape-to-

Health Care FIIUincing ReviewSpring 1993Volume 14 Number 3 14

Table 1 Variation In Average Medicaid Fees All Services by State United States Fiscal Year 1990

Ratio of State Medicaid Maximum Fees to National Average Medicaid

Fees Adjusted for

Cost ot Ratio of Medicaid Maximum Fees to

Medicare Medicare

State Physician

Unadjusted Practtce1 Allowed Prevailing Private Charges Charges Fees

All 100 100 085 074 065

Alabama 114 123 oao 071 064 Alaska 135 097 114 099 094 Arkansas 098 114 117 105 oao California 104 085 059 052 049 ColOrado 109 107 094 084 064 Connecticut 106 095 065 054 045 Delaware 073 066 074 065 052 District of Columbia 114 091 062 055 044 Florida 117 115 086 073 066 Georgia 159 172 112 096 083 Hawaii 092 084 062 073 063 Idaho 137 146 086 084 078 Illinois 082 072 086 055 055 Indiana 117 122 125 107 100 Iowa 106 113 102 096 077 Kansas 097 105 085 074 065 Kentucky 092 099 083 071 069 Louisiana 111 114 105 095 085 Maine 090 101 069 059 059 Maryland 107 093 059 046 054 Massachusetts 149 137 098 085 070 Michigan 084 055 071 066 059 Minnesota 102 101 104 088 071 Mississippi 074 084 074 069 056 Missouri 067 070 068 056 049 Montana 089 098 089 073 064 Nebraska 099 113 113 100 096 Nevada 148 129 087 073 076 New Hampshire 111 118 081 073 061 New Jersey 059 050 047 040 033 New Mexico 065 067 086 074 059 New York 103 085 032 029 029 North Carolina 109 122 092 078 068 North Dakota 085 093 089 079 068 Ohio 064 084 065 054 058 Oklahoma 100 110 086 076 068 Oregon 110 110 079 072 059 Pennsylvania 056 054 061 053 046 South Carolina 097 108 100 085 076 South Dakota 087 102 110 091 076 Tennessee 097 107 107 093 081 Texas 125 115 107 095 088 Utah 083 084 101 085 067 Vermont 098 113 073 oao 057 Virginia 127 128 109 095 071 Washington 096 089 075 067 057 West Virginia 074 081 041 034 036 Wisconsin 085 087 081 069 062 Wyoming 112 115 125 102 084 1Thls deflation Is based on the Geographic Practice Cost tnlttex using the full value of physicians work

SOURCE Urban inslltute tabulallons of Urban Institute Survey of Medicaid Physician Fees Heslth Insurance Association of Americas Prevailing Healthcare Charges System and Part B Medicare Annual Data

Health Care Financing RevftiSpring 1993votume 14 Number 3 15

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

to-Tape data from Michigan Georgia and Tennessee (Wade 1992) These estimates of changes In utilization covered a wide range of services eg hospital admlsmiddot slons surgeries and ancillary services

The main results of this research are that strict adoption of the MFS would lead to increases in Medicaid spending of $25-$29 billion (39 percent and 44 permiddot cent respectively) depending on the immiddot pact of the fee increase on volume If States adopted the MFS with variations the costs would be different For exammiddot pie Medicaid obstetrical fees are higher than the Medicare fee schedule amounts In all but 16 States If States keep their obshystetrical fees above Medicare levels to enmiddot courage access to obstetrical care for Medicaid beneficiaries the costs would increase by an additional $10 billion On the other hand If Medicaid programs are required to pay only 90 percent of the MFS Medicaid expenditures would only increase by $18-$20 billion (28 percent and 31 percent respectively)

All these estimated Increases are larger than the Thorpe estimates for three reamiddot sons First our estimates are based on 1990 data Medicaid expenditures inshycreased by approximately 20 percent from 1988 to 1990 Thus our expenditureshyincrease estimates are relative to a signlfimiddot cantly larger base Second Thorpe estimiddot mated the effects of increasing Medicaid fees relative to Medicare under the previmiddot ous Medicare payment system The MFS will significantly increase fees for most primary care services Medicaid fees for these services have tended to be low relamiddot live to other services Because primary care services are so Important in the Medmiddot icald market basket adopting the MFS would have a substantial effect in most States The reductions in most surgery

fees by Medicare would have less of an impact because there would be less of a change in Medicaid fees for these sermiddot vices and because surgical procedures are of less importance to Medicaid pashytients Third we used evidence that there would in fact be a positive behavioral reshysponse to a Medicaid fee increase The behavioral response evidence Indicates that increasing Medicaid fees would have a positive effect on access to most physlmiddot clan services hospital outpatient care and prescription drugs There is also evimiddot dence of an offsetting effect of declining Inpatient surgery and hospital days for children Because the evidence Indicates that the net effect of increasing Medicaid fees would be to increase access and utimiddot lization we estimate that the cost of the Medicaid fee increase would be higher than previous studies have estimated

METHODS

Our analysis relied on data from a new survey of Medicaid physician fees (Holahan 1991) The survey collected fee information from all States for fiscal year 1990 on 54 different physician services We attempted to collect fee data on sermiddot vices that are representative of the mal1ltet baskets consumed by different types of Medicaid recipients-infants young chi Imiddot dren women in their childbearing years older male and female adults and the disabled The large number of services included in our survey permitted us to deshyvelop comparisons among Medicaid Medicare and private payers for different

A list of the procedures is available upon request from the aumiddot thO- 2fhe survey procedures accounted for more than one-half the expenditures for Infants individuals under the age of 19 and the disabled The procedures are somewhat less representashytive for oldermales and females

Heallh Care Financing RevklwiSprlng 1993volume 1bull Number 3 13

population groups and for different types of services such as primary care hospital visits obstetrical care surgery laboratory tests and Imaging Medicaid fees were compared with both Medicare-allowed and Medicare-prevailing charges (using data from the Part B Medicare Annual Data procedure and prevailing charge files) and with private payers (using data from the Health Insurance Association of America) Expenditure weights derived from Medicaid claims in the Health Care Financing Administration (HCFA) Tape-to-Tape data were used to create fee indexes that account for the relative difshyferences across procedures Data for the 54 survey procedures from California Georgia Michigan and Tennessee were used to compute the weights

The dominant finding of the analysis Is extreme variation across the country in how well Medicaid programs pay for physhysician services Some States pay exshytremely well by the standards of Medicare and even private payers Others pay very poorly The results are shown In Table 1 Medicaid fees after adjusting for the cost of physicians practice (column 2) vary by a factor of more than 3 Many of the States with relatively high physician fees are smaller States in the South and West many of the States with low fee policies are large industrialized States We found that on average Medicaid fees for surshygery services obstetrical care and imagshyIng tend to be higher than for office visits and laboratory tests relative to Medicare and private fees Medicaid fees for surgishycal procedures are high relative to Medishycare fees but relatively low compared with private fees This is probably beshycause Medicare In recent years has limshyited the rates of growth in Medicare surgishycal fees

Estimating the impact of a fee increase on Medicaid expenditures requires knowledge of the effect of fee increases on access and utilization The literature indicates that Medicaid enrollees utilizashytion of services is related to Medicaid fee levels (Long Settle and Stuart 1986 Cohen 1989 and 1991) We use Wades (1992) estimated models of Medicaid sershyvice utilization to account for the effects of fee levels on service utilization

Wade estimates a linear model of sershyvices per enrollee The models indepenshydent variables are the weighted average ratio of 1988 Medicaid fees to private charges per capita Income the ratio of Medicaid enrollees to total population the number of primary care physicians per capita the number of hospital beds per capita occupancy rates the proporshytion of teaching beds and the proportion of public beds The model also controls for enrollees age sex race enrollment category length of enrollment and whether the enrollee is In a fee-for-service managed care program The analysis also controls for enrollees State of residence and whether the enrollees county of resishydence Is urban or rural The State indicashytor variables control for numerous facshytors including State Medicaid policies

The model is estimated for several cateshygories of service physlcan office visits clinic visits hospital outpatient departshyment visits hospital inpatient services surgical procedures prescription drug use and radiology and laboratory sershyvices The models are estimated sepashyrately for non-institutionalized children and adults excluding the blind the disshyabled and the elderly

The analysis of enrollee utilization uses data for Georgia Michigan and Tennesshysee extracted from HCFAs 1988 Tape-to-

Health Care FIIUincing ReviewSpring 1993Volume 14 Number 3 14

Table 1 Variation In Average Medicaid Fees All Services by State United States Fiscal Year 1990

Ratio of State Medicaid Maximum Fees to National Average Medicaid

Fees Adjusted for

Cost ot Ratio of Medicaid Maximum Fees to

Medicare Medicare

State Physician

Unadjusted Practtce1 Allowed Prevailing Private Charges Charges Fees

All 100 100 085 074 065

Alabama 114 123 oao 071 064 Alaska 135 097 114 099 094 Arkansas 098 114 117 105 oao California 104 085 059 052 049 ColOrado 109 107 094 084 064 Connecticut 106 095 065 054 045 Delaware 073 066 074 065 052 District of Columbia 114 091 062 055 044 Florida 117 115 086 073 066 Georgia 159 172 112 096 083 Hawaii 092 084 062 073 063 Idaho 137 146 086 084 078 Illinois 082 072 086 055 055 Indiana 117 122 125 107 100 Iowa 106 113 102 096 077 Kansas 097 105 085 074 065 Kentucky 092 099 083 071 069 Louisiana 111 114 105 095 085 Maine 090 101 069 059 059 Maryland 107 093 059 046 054 Massachusetts 149 137 098 085 070 Michigan 084 055 071 066 059 Minnesota 102 101 104 088 071 Mississippi 074 084 074 069 056 Missouri 067 070 068 056 049 Montana 089 098 089 073 064 Nebraska 099 113 113 100 096 Nevada 148 129 087 073 076 New Hampshire 111 118 081 073 061 New Jersey 059 050 047 040 033 New Mexico 065 067 086 074 059 New York 103 085 032 029 029 North Carolina 109 122 092 078 068 North Dakota 085 093 089 079 068 Ohio 064 084 065 054 058 Oklahoma 100 110 086 076 068 Oregon 110 110 079 072 059 Pennsylvania 056 054 061 053 046 South Carolina 097 108 100 085 076 South Dakota 087 102 110 091 076 Tennessee 097 107 107 093 081 Texas 125 115 107 095 088 Utah 083 084 101 085 067 Vermont 098 113 073 oao 057 Virginia 127 128 109 095 071 Washington 096 089 075 067 057 West Virginia 074 081 041 034 036 Wisconsin 085 087 081 069 062 Wyoming 112 115 125 102 084 1Thls deflation Is based on the Geographic Practice Cost tnlttex using the full value of physicians work

SOURCE Urban inslltute tabulallons of Urban Institute Survey of Medicaid Physician Fees Heslth Insurance Association of Americas Prevailing Healthcare Charges System and Part B Medicare Annual Data

Health Care Financing RevftiSpring 1993votume 14 Number 3 15

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

population groups and for different types of services such as primary care hospital visits obstetrical care surgery laboratory tests and Imaging Medicaid fees were compared with both Medicare-allowed and Medicare-prevailing charges (using data from the Part B Medicare Annual Data procedure and prevailing charge files) and with private payers (using data from the Health Insurance Association of America) Expenditure weights derived from Medicaid claims in the Health Care Financing Administration (HCFA) Tape-to-Tape data were used to create fee indexes that account for the relative difshyferences across procedures Data for the 54 survey procedures from California Georgia Michigan and Tennessee were used to compute the weights

The dominant finding of the analysis Is extreme variation across the country in how well Medicaid programs pay for physhysician services Some States pay exshytremely well by the standards of Medicare and even private payers Others pay very poorly The results are shown In Table 1 Medicaid fees after adjusting for the cost of physicians practice (column 2) vary by a factor of more than 3 Many of the States with relatively high physician fees are smaller States in the South and West many of the States with low fee policies are large industrialized States We found that on average Medicaid fees for surshygery services obstetrical care and imagshyIng tend to be higher than for office visits and laboratory tests relative to Medicare and private fees Medicaid fees for surgishycal procedures are high relative to Medishycare fees but relatively low compared with private fees This is probably beshycause Medicare In recent years has limshyited the rates of growth in Medicare surgishycal fees

Estimating the impact of a fee increase on Medicaid expenditures requires knowledge of the effect of fee increases on access and utilization The literature indicates that Medicaid enrollees utilizashytion of services is related to Medicaid fee levels (Long Settle and Stuart 1986 Cohen 1989 and 1991) We use Wades (1992) estimated models of Medicaid sershyvice utilization to account for the effects of fee levels on service utilization

Wade estimates a linear model of sershyvices per enrollee The models indepenshydent variables are the weighted average ratio of 1988 Medicaid fees to private charges per capita Income the ratio of Medicaid enrollees to total population the number of primary care physicians per capita the number of hospital beds per capita occupancy rates the proporshytion of teaching beds and the proportion of public beds The model also controls for enrollees age sex race enrollment category length of enrollment and whether the enrollee is In a fee-for-service managed care program The analysis also controls for enrollees State of residence and whether the enrollees county of resishydence Is urban or rural The State indicashytor variables control for numerous facshytors including State Medicaid policies

The model is estimated for several cateshygories of service physlcan office visits clinic visits hospital outpatient departshyment visits hospital inpatient services surgical procedures prescription drug use and radiology and laboratory sershyvices The models are estimated sepashyrately for non-institutionalized children and adults excluding the blind the disshyabled and the elderly

The analysis of enrollee utilization uses data for Georgia Michigan and Tennesshysee extracted from HCFAs 1988 Tape-to-

Health Care FIIUincing ReviewSpring 1993Volume 14 Number 3 14

Table 1 Variation In Average Medicaid Fees All Services by State United States Fiscal Year 1990

Ratio of State Medicaid Maximum Fees to National Average Medicaid

Fees Adjusted for

Cost ot Ratio of Medicaid Maximum Fees to

Medicare Medicare

State Physician

Unadjusted Practtce1 Allowed Prevailing Private Charges Charges Fees

All 100 100 085 074 065

Alabama 114 123 oao 071 064 Alaska 135 097 114 099 094 Arkansas 098 114 117 105 oao California 104 085 059 052 049 ColOrado 109 107 094 084 064 Connecticut 106 095 065 054 045 Delaware 073 066 074 065 052 District of Columbia 114 091 062 055 044 Florida 117 115 086 073 066 Georgia 159 172 112 096 083 Hawaii 092 084 062 073 063 Idaho 137 146 086 084 078 Illinois 082 072 086 055 055 Indiana 117 122 125 107 100 Iowa 106 113 102 096 077 Kansas 097 105 085 074 065 Kentucky 092 099 083 071 069 Louisiana 111 114 105 095 085 Maine 090 101 069 059 059 Maryland 107 093 059 046 054 Massachusetts 149 137 098 085 070 Michigan 084 055 071 066 059 Minnesota 102 101 104 088 071 Mississippi 074 084 074 069 056 Missouri 067 070 068 056 049 Montana 089 098 089 073 064 Nebraska 099 113 113 100 096 Nevada 148 129 087 073 076 New Hampshire 111 118 081 073 061 New Jersey 059 050 047 040 033 New Mexico 065 067 086 074 059 New York 103 085 032 029 029 North Carolina 109 122 092 078 068 North Dakota 085 093 089 079 068 Ohio 064 084 065 054 058 Oklahoma 100 110 086 076 068 Oregon 110 110 079 072 059 Pennsylvania 056 054 061 053 046 South Carolina 097 108 100 085 076 South Dakota 087 102 110 091 076 Tennessee 097 107 107 093 081 Texas 125 115 107 095 088 Utah 083 084 101 085 067 Vermont 098 113 073 oao 057 Virginia 127 128 109 095 071 Washington 096 089 075 067 057 West Virginia 074 081 041 034 036 Wisconsin 085 087 081 069 062 Wyoming 112 115 125 102 084 1Thls deflation Is based on the Geographic Practice Cost tnlttex using the full value of physicians work

SOURCE Urban inslltute tabulallons of Urban Institute Survey of Medicaid Physician Fees Heslth Insurance Association of Americas Prevailing Healthcare Charges System and Part B Medicare Annual Data

Health Care Financing RevftiSpring 1993votume 14 Number 3 15

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

Table 1 Variation In Average Medicaid Fees All Services by State United States Fiscal Year 1990

Ratio of State Medicaid Maximum Fees to National Average Medicaid

Fees Adjusted for

Cost ot Ratio of Medicaid Maximum Fees to

Medicare Medicare

State Physician

Unadjusted Practtce1 Allowed Prevailing Private Charges Charges Fees

All 100 100 085 074 065

Alabama 114 123 oao 071 064 Alaska 135 097 114 099 094 Arkansas 098 114 117 105 oao California 104 085 059 052 049 ColOrado 109 107 094 084 064 Connecticut 106 095 065 054 045 Delaware 073 066 074 065 052 District of Columbia 114 091 062 055 044 Florida 117 115 086 073 066 Georgia 159 172 112 096 083 Hawaii 092 084 062 073 063 Idaho 137 146 086 084 078 Illinois 082 072 086 055 055 Indiana 117 122 125 107 100 Iowa 106 113 102 096 077 Kansas 097 105 085 074 065 Kentucky 092 099 083 071 069 Louisiana 111 114 105 095 085 Maine 090 101 069 059 059 Maryland 107 093 059 046 054 Massachusetts 149 137 098 085 070 Michigan 084 055 071 066 059 Minnesota 102 101 104 088 071 Mississippi 074 084 074 069 056 Missouri 067 070 068 056 049 Montana 089 098 089 073 064 Nebraska 099 113 113 100 096 Nevada 148 129 087 073 076 New Hampshire 111 118 081 073 061 New Jersey 059 050 047 040 033 New Mexico 065 067 086 074 059 New York 103 085 032 029 029 North Carolina 109 122 092 078 068 North Dakota 085 093 089 079 068 Ohio 064 084 065 054 058 Oklahoma 100 110 086 076 068 Oregon 110 110 079 072 059 Pennsylvania 056 054 061 053 046 South Carolina 097 108 100 085 076 South Dakota 087 102 110 091 076 Tennessee 097 107 107 093 081 Texas 125 115 107 095 088 Utah 083 084 101 085 067 Vermont 098 113 073 oao 057 Virginia 127 128 109 095 071 Washington 096 089 075 067 057 West Virginia 074 081 041 034 036 Wisconsin 085 087 081 069 062 Wyoming 112 115 125 102 084 1Thls deflation Is based on the Geographic Practice Cost tnlttex using the full value of physicians work

SOURCE Urban inslltute tabulallons of Urban Institute Survey of Medicaid Physician Fees Heslth Insurance Association of Americas Prevailing Healthcare Charges System and Part B Medicare Annual Data

Health Care Financing RevftiSpring 1993votume 14 Number 3 15

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

Tape data to measure service utilization3

The Tape-to-Tape data consist of individmiddot ual claims for all services provided to all Medicaid enrollees in the participating States approximately 1 million children and05 million adults

The estimated coefficients of the model of physician office visits are genshyerally consistent with theoretical exshypectations For example from Sloan Cromwell and Mitchells (1978) model of physician participation the expectations are that use of physician services should be positively related to the Medicaid fee index inversely related to private deshymand and positively related to physician supply Wades empirical results are genmiddot erally consistent with these expectations and are statistically significant

Wades analysis has several strengths For example the large sample size pershymits greater precision In estimating the effects of Medicaid fee levels than has been possible previously Moreover the data report information on all services used by Medicaid enrollees Wades analshyysis also addresses some methodologishycal limitations of prior literature such as Long Settle and Stuarts (1986) omission of supply variables However Wades analysis has two potential limitations that should be noted First the analysis is based on data from only three States However the estimated models use blmiddot nary indicator variables to control for State effects Second the analysis may be limited by its use of utilization as a measure of Medicaid enrollees access A positive relationship between Medicaid fee levels and utilization could suggest that enrollees overutilize services In genshy

3 Data from California another of the Tape-to-Tape States is omitted because lt does not contain information on enrollees

middotmiddot

eral however Increases In utilization probably reflect Improvements in access for this population

The basic results of Wades analysis are summarized in Table 2 Higher physimiddot cian fees are associated with an Increase in the number of physician office visits per enrollee There is also an increase in clinic services for adults but no statistimiddot cally significant difference for children The results also indicate that hospital outmiddot patient department visits are positively reshylated to Medicaid fee levels though the result is not statistically significant for adults The positive impact presumably reflects the fact that outpatient departshyments are not simply substitutes for physhysicians offices they are also compleshyments eg providing specialist services or diagnostic procedures

For children higher fees are associated with less Inpatient surgery but more outmiddot patient surgery For adults both Inpatient and outpatient surgery are positively reshylated to physician fees Increasing fees has a negative effect on the number of

Table 2 Estimated Elasticities of Services per

Enrollee with Respect to Medicaid Fee Index

Services Children Adults

Physician Office Visits middotmiddoto22 --o22 Clinic Visits 021 078 Hospital Outpatient

Department Visits 063 009 Other Physician Services bullbullbull -057 1018 Hospital Discharges -007 006 Inpatient Physician Visits 006 022 Hospital Days 047 004 Inpatient Surgery -086 038 Outpatient Surgery middotmiddoto34 042 Prescription Drugs and

Refills 043 bullbullo36 Laboratory and X-ray

Services 1 -026 1-041 1Theseelastlcities represent changes in expenditure levels not in the amount of service received bullstatistically significant at the 10 level

bullbullstatistically significant at the 051evel SOURCE (Wade 1992)

Heahh Care Financing ReviewSpring 1993volume 14 Numbelt 3 16

hospital discharges and days per enrollee for children but not for adults This is conmiddot sistent with the negative effect on inpamiddot tlent surgery for children Additionally higher fees are associated with lower exmiddot penditures on laboratory and X-ray sermiddot vices (The Tape-to-Tape data did not permiddot mit aggregation across laboratory and Xmiddot ray services to obtain a count of services per enrollee instead estimates of expenmiddot dltures per enrollee were made) Finally higher physician fees are positively assoshyciated with the number of prescriptions per enrollee The results imply that higher physician fees are associated with an inmiddot crease in access for Medicaid recipients and some increase in overall utilization

The results of the estimated model of services per enrollee were used to simushylate the impact of an increase in Medicaid fees to MFS levels The simulations comshypute total expenditures under the fee schedule using the following equation

E11 = E12 (1 + _)(1 + p1)

where E11 is Medicaid expenditures In State i

at M FS levels E12 is Medicaid expenditures In State i

at actual1990 Medicaid fee levels is the percent change In the Medicmiddot p1 aid fee index in State i associated with increasing fees to MFS levels is the percent change in services per q1 enrollee In State i _ = pe

amp is the elasticity of services per enmiddot rollee with respect to the Medicaid fee index

Baseline Medicaid expenditure data for each State were taken from the HCFA-2082 reports expenditures from that data set were adjusted as necessary

to be consistent with the HCFA-64 reshyports These calculations were made for physician services hospital inpatient care hospital outpatient care and clinics and prescription drugs Estimates were made only for children adults the blind and the disabled It is assumed that the aged will be unaffected because Medicshyaid primarily pays only Medicare deductmiddot ibles and coinsurance We did not have utilization equations for the blind and the disabled we therefore used the elasticity estimates for adults This may cause some bias In the results though the direcmiddot lion is unclear

The estimates of the impact of Medicshyaid fees on utilization are based on a samshyple of three States The ratio of Medicaid fees to private fees ranged from 066 to 100 Because some States had Medicaidmiddot to-private-fee ratios below the bottom of this range we are reluctant to rely solely on extrapolations from our elasticity estlmiddot mates to the experience of all States Thus we present alternative results based on somewhat arbitrary limits on the impact of the fee increase on volume That is we assumed there would be no further behavioral response beyond a specified increase in fees (The limits apshyply only to the volume response the full fee increase is assumed) We used three assumptions the first that there would be no response beyond that implied by a 33-percent increase In fees the second that there would be no response beyond that implied by a 50-percent increase in fees finally that utilization would conmiddot tinue to respond no matter how great the fee increase

The effects of increasing Medicaid fees to the level specified by the MFS assummiddot ing that it was adopted In 1990 are shown in Table 3 We also present three alternamiddot

Health Care Flnanclng RevtewiSprlng 1993volume 14 Number3 17

tive approaches to moving toward the MFS The first uses the Medicare fee schedule as a floor permitting States to pay more generously If they currently do so The second requires States to use the MFS but permits them to pay their current rates for obstetrical care if they currently pay more than Medicare Given the high level of Interest in getting access forMedmiddot icaid recipients to obstetrical care it may be important to permit States to continue to pay amounts higher than the Medicare levels for these services The third altemamiddot tive a more frugal approach requires States to pay only 90 percent of the MFS All percentage increases in costs are relamiddot live to Medicaid expenditures in 1990 asmiddot suming the fee schedule had been adopted in that year To arrive at MFS amounts In 1990 we used the 1991 conmiddot version factor provided in the Federal Register(1991) rather than the conversion factor actually used in 1992 this genermiddot ated 1991 MFS fees that were then demiddot flated by the Medicare Economic Index update factor (20 for primary care sermiddot vices 0 for other services)

The results indicate that requiring Medmiddot lcaid programs to adopt the MFS would

result in increases of $25-$29 billionshy39 percent to 44 percent (The results vary with the behavioral response limits assumed the high estimate is probably unrealistic) If Medicaid programs were permitted to continue to pay more than the MFS amounts (If they are already doshyIng so) while bringing other fees up to the levels of the MFS the increase in expenmiddot dltures would range from $35 to $40 bilmiddot lion The third alternative permitting States to continue to pay more than the MFS amounts for obstetrical services would reduce expenditures slightly commiddot pared with the second alternative Expenmiddot ditures would increase by $34middot$39 bilmiddot lion The differences between the second and third alternatives are not large primiddot marlly because obstetrical services are the most important set of procedures that are consistently higher than the MFS For the final alternative requiring Medicaid to pay 90 percent of the MFS the results show that the Increase in Medicaid exmiddot penditures would range from $18 to $20 billion-28 percent to 31 percent-demiddot pending on the response limit chosen

Table 4 shows results by State for the first option strict adoption of the Medimiddot

Table 3

Increases in Medicaid Expenditures Under Alternative Fee Policies Using Alternative Assumptions of Behavioral Response

Increase Percent Increase Percent in Medicaid Increase in Medicaid Increase Increase Percent Expenditures in Medicaid Expenditures In Medicaid In Medicaid Increase in Billions Expenditures In Billions Expenditures Expenditures In Medicaid

with 33 with 33 with 50 with 50 in Billions Expenditures Percent Percent Percent Percent with No with No

Policy Cap Cap Cap Cap cap cap

Medicaid Adopts MFS $25 39 $26 40 $29 44 Medicaid Uses MFS

As a Floor 35 54 36 55 40 61 Medicaid Adopts MFS

Except for Obstetrics 34 52 35 53 39 59 Medicaid Pays 90 Percent

of MFS 18 28 19 29 20 31 NOTE MFS is Medicare fee schedule SOURCE Urban Institute simulations

Health Care Financing RevlewiSpring 1993volume 14 Number 3 18

Table 4 Percent Increase In Medicaid Expenditures by State and Nation for Children Adults the

Blind and tho Disabled (Behavioral Response Capped at 50 Percent) Percent Increase Percent

Total Increase in Relative Increase Spending in Medicaid Spending in to Current Relative

Millions Spending in Millions Spending on to Total on Affected Millions on Affected Affected Spending on

State Services 1990 1990 Services 1990 Services All Groups

All $275699 $655300 $26211 95 40

Alabama 3673 7452 181 49 24 Alaska 855 1517 -26 -30 -17 Arkansas 2425 5943 20 08 03 caJifomla 36574 64322 4676 128 73 Colorado 1920 5212 184 96 35 Connecticut 2511 11956 163 65 14 Delaware 452 1245 33 74 27 District of Columbia 1908 3919 155 81 40 Florida 11954 23846 368 31 15 Georgia 7999 15327 41 05 03 Hawaii 807 2003 64 80 32 Idaho 565 1542 33 59 ~2 Illinois 10725 23374 1533 143 88 Indiana 5415 13618 32 06 02 Iowa 2467 6101 195 79 32 Kansas 1764 4786 190 108 40 Kentucky 5161 9862 086 114 59 Louisiana 6638 13620 113 17 08 Maine 1251 4181 212 170 51 Maryland 5609 11058 833 149 75 Massachusetts 10542 30465 146 14 05 Michigan 13008 24360 1809 139 74 Minnesota 3481 14188 25 07 02 Mississippi 3173 5929 868 274 146 Missouri 3429 8624 316 92 37 Montana 699 1877 61 87 32 Nebraska 1108 3071 45 40 15 Neada 887 1448 12 17 08 New Hampshire 429 2204 45 104 20 New Jersey 9338 23602 1385 148 59 New Mexico 1497 2881 143 96 50 New York 40985 120308 5935 145 49 North Carolina 6231 14662 316 51 ~2 North Dakota 546 1979 33 60 17 Ohio 13525 31114 1273 94 41 Oklahoma 2765 6973 156 56 22 Oregon 1752 5013 166 95 33 Pennsylvania 8616 28221 1381 160 49 South Carolina 4123 8341 145 35 17 South Dakota 802 1674 26 43 15 Tennessee 8579 13883 312 36 22 Texas 13398 29746 -74 -05 -02 Utah 1291 2591 139 108 54 Vermont 503 1512 83 165 55 Virginia 4039 10149 229 57 23 Washington 5133 12002 700 136 58 West Virginia 1778 3954 558 314 141 Wisconsin 3398 13005 3amp5 113 30 Wyoming 373 865 05 14 08 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 19931volume14Num~r3 19

care fee schedule To simplify the presenshytation we show the case of no behavioral response beyond a 50-percent increase In fees The first column Indicates the level of 199() Medicaid spending on the sershyvices we assume to be affected by Medicshyaid fee changes These are physician sershyvices hospital inpatient and outpatient care and prescription drugs for children non-elde~y adults the blind and the disshyabled Unaffected services include nursshying home care home health care dental services and so forth We also assume that all services used by the elderly are unaffected because of Medicare covershyage The second column presents total Medicaid spending for all services for all groups In each State The third column contains our projected change In expenshyditures following adoption of the MFS The fourth column shows the projected percent increase relative to current spending on the affected services The fifth column provides the estimated pershycent increase relative to all Medicaid spending in the State

The table demonstrates that the impact va~es considerably across States In two States expenditures are projected to deshycline The largest Increases would be In Mississippi (146 percent) and West Virshyginia (141 percent) The increases by State depend on both the percent inshycrease in Medicaid fees and the Imporshytance of physician services In the overall spending by each State The fourth colshyumn Indicates the percent increase relashytive to current spending on affected sershyvices For these services expenditures would Increase by 314 percent In West Virginia 274 percent in Mississippi and by 140-160 percent in large States such as Pennsylvania Maryland New Jersey New York and Illinois

The rest of our discussion provides more detail on these results First Table 5 provides information on the increases in Medicaid fees that would be required In each State to increase them to the MFS On average States would be faced with a 486-percent increase in fees Because Medicaid fees vary considerably across States the impact of adopting the MFS also varies widely The results indicate that five States (West Virginia New York New Jersey Pennsylvania and Missoun) would have more than a twofold increase in their average fee levels Many other States would have fee increases of more than 50 percent The two States (Texas and Alaska) with Medicaid fee levels above Medicare levels in 1990would actushyally reduce fees

Most of the increases in fees would come In primary care services and hospishytal visits Primary care services would inshycrease on average by 661 percent and fees for hospital visits would double On the other hand fees for obstet~cal care would actually come down on average Our survey results indicate that only 14 States had fees for obstetrical services lower than the levels In the new MFS Surshygical fees would also be relatively unafshyfected on average In many States there would be significant decreases In Medicshyaid fees to bring them in line with Medishycare levels Other States would experishyence some increase

Table 6 examines the percent increase in US Medicaid expenditures for each afshyfected service (hospital inpatient care outpatient services prescription drugs and physician services) for children adults the blind and the disabled Recall that estimates for the blind and the disshyabled used the elasticity estimates for the adult population The results (under the

Health Care Financing Review1Sprlng1993volume 14 Number3 20

Table 5 Percent Increases in Medicaid Fees Required to Equal the New Medicare Fee Schedule by

Type of Service Percent Increase Fiscal Year 1990

State All Fees Primary ca Hospital

VIsits Obstetrics Surgery laboratory

Tests Imaging

Percent All 486 661 1050 -64 95 318 346

Alabama 390 635 842 -231 -111 231 311 Alaska -133 -71 -187 -179 -560 75 -06 Arkansas 39 75 78 -11 -215 126 71 California 564 816 787 75 129 144 502 Colorado 349 475 790 -155 247 -70 389 Connecticut 620 921 937 -68 62 343 694 Delaware 008 1079 565 32 10 250 165 District of Columbia 573 796 1417 -381 330 1264 411 Florida 186 433 182 -74 -42 39 -242 Georgia Hawaii

18 259

285 282

41 227

-433 429

-474 -296

-126 308

80 155

Idaho 218 408 614 -361 -05 137 199 Illinois 795 847 1723 -91 98 453 1754 Indiana 23 118 142 -121 -462 -237 92 Iowa 292 485 655 -99 -268 249 87 Kansas 541 488 2319 -25 21 101 -157 Kentucky Louisiana

402 90

728 280

880 246

-272 -421

-184 -12

143 16

83 201

Maine 790 946 1632 -55 723 146 899 Maryland Massachusetts

966 109

1024 58

2917 552

-410 -302

840 -41

202 302

1175 713

Michigan Minnesota

749 225

762 382

1652 343

267 08

328 -227

975 330

657 51

Mississippi Missouri

974 1017

1306 1174

2489 2144

-199 227

509 835

396 253

182 655

Montana 329 450 444 77 59 -32 405 Nebraska 156 274 539 -42 -54 -128 -355 Nevada 63 151 324 -292 -337 82 331 New Hampshire 006 472 2085 -241 655 507 978 New Jersey New Mexico

1668 349

1690 433

3491 575

721 -21

1273 -176

1814 1295

1206 598

New York 2290 2426 5916 -104 2104 4934 1158 North Carolina 267 501 510 -196 -209 42 192 North Dakota 310 609 513 -110 -74 -29 -169 Ohio 711 884 1617 137 134 123 327 Oklahoma 342 621 572 -54 -242 -13 10 Oregon Pennsylvania South Carolina

361 1028 223

524 1494 378

006 1300

879

-135 432

-382

08 167 26

167 982 -67

313 282

68 South Dakota 240 426 240 179 -265 -13 -141 Tennessee 161 148 773 07 -246 -185 -05 Texas -21 194 290 -409 -410 -374 -319 Utah 423 525 288 272 04 215 818 vermont 546 813 924 -155 510 -17 438 Virginia Washington West Virginia Wisconsin

203 488

1834 513

478 515

2672 837

306 1254 2859

603

-242 26

160 223

-395 287 882

-186

-147 167 159 148

215 466

1185 -08

Wyoming 55 126 370 -135 -195 -108 -138 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 1993volume 14 Number3 21

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

tive approaches to moving toward the MFS The first uses the Medicare fee schedule as a floor permitting States to pay more generously If they currently do so The second requires States to use the MFS but permits them to pay their current rates for obstetrical care if they currently pay more than Medicare Given the high level of Interest in getting access forMedmiddot icaid recipients to obstetrical care it may be important to permit States to continue to pay amounts higher than the Medicare levels for these services The third altemamiddot tive a more frugal approach requires States to pay only 90 percent of the MFS All percentage increases in costs are relamiddot live to Medicaid expenditures in 1990 asmiddot suming the fee schedule had been adopted in that year To arrive at MFS amounts In 1990 we used the 1991 conmiddot version factor provided in the Federal Register(1991) rather than the conversion factor actually used in 1992 this genermiddot ated 1991 MFS fees that were then demiddot flated by the Medicare Economic Index update factor (20 for primary care sermiddot vices 0 for other services)

The results indicate that requiring Medmiddot lcaid programs to adopt the MFS would

result in increases of $25-$29 billionshy39 percent to 44 percent (The results vary with the behavioral response limits assumed the high estimate is probably unrealistic) If Medicaid programs were permitted to continue to pay more than the MFS amounts (If they are already doshyIng so) while bringing other fees up to the levels of the MFS the increase in expenmiddot dltures would range from $35 to $40 bilmiddot lion The third alternative permitting States to continue to pay more than the MFS amounts for obstetrical services would reduce expenditures slightly commiddot pared with the second alternative Expenmiddot ditures would increase by $34middot$39 bilmiddot lion The differences between the second and third alternatives are not large primiddot marlly because obstetrical services are the most important set of procedures that are consistently higher than the MFS For the final alternative requiring Medicaid to pay 90 percent of the MFS the results show that the Increase in Medicaid exmiddot penditures would range from $18 to $20 billion-28 percent to 31 percent-demiddot pending on the response limit chosen

Table 4 shows results by State for the first option strict adoption of the Medimiddot

Table 3

Increases in Medicaid Expenditures Under Alternative Fee Policies Using Alternative Assumptions of Behavioral Response

Increase Percent Increase Percent in Medicaid Increase in Medicaid Increase Increase Percent Expenditures in Medicaid Expenditures In Medicaid In Medicaid Increase in Billions Expenditures In Billions Expenditures Expenditures In Medicaid

with 33 with 33 with 50 with 50 in Billions Expenditures Percent Percent Percent Percent with No with No

Policy Cap Cap Cap Cap cap cap

Medicaid Adopts MFS $25 39 $26 40 $29 44 Medicaid Uses MFS

As a Floor 35 54 36 55 40 61 Medicaid Adopts MFS

Except for Obstetrics 34 52 35 53 39 59 Medicaid Pays 90 Percent

of MFS 18 28 19 29 20 31 NOTE MFS is Medicare fee schedule SOURCE Urban Institute simulations

Health Care Financing RevlewiSpring 1993volume 14 Number 3 18

Table 4 Percent Increase In Medicaid Expenditures by State and Nation for Children Adults the

Blind and tho Disabled (Behavioral Response Capped at 50 Percent) Percent Increase Percent

Total Increase in Relative Increase Spending in Medicaid Spending in to Current Relative

Millions Spending in Millions Spending on to Total on Affected Millions on Affected Affected Spending on

State Services 1990 1990 Services 1990 Services All Groups

All $275699 $655300 $26211 95 40

Alabama 3673 7452 181 49 24 Alaska 855 1517 -26 -30 -17 Arkansas 2425 5943 20 08 03 caJifomla 36574 64322 4676 128 73 Colorado 1920 5212 184 96 35 Connecticut 2511 11956 163 65 14 Delaware 452 1245 33 74 27 District of Columbia 1908 3919 155 81 40 Florida 11954 23846 368 31 15 Georgia 7999 15327 41 05 03 Hawaii 807 2003 64 80 32 Idaho 565 1542 33 59 ~2 Illinois 10725 23374 1533 143 88 Indiana 5415 13618 32 06 02 Iowa 2467 6101 195 79 32 Kansas 1764 4786 190 108 40 Kentucky 5161 9862 086 114 59 Louisiana 6638 13620 113 17 08 Maine 1251 4181 212 170 51 Maryland 5609 11058 833 149 75 Massachusetts 10542 30465 146 14 05 Michigan 13008 24360 1809 139 74 Minnesota 3481 14188 25 07 02 Mississippi 3173 5929 868 274 146 Missouri 3429 8624 316 92 37 Montana 699 1877 61 87 32 Nebraska 1108 3071 45 40 15 Neada 887 1448 12 17 08 New Hampshire 429 2204 45 104 20 New Jersey 9338 23602 1385 148 59 New Mexico 1497 2881 143 96 50 New York 40985 120308 5935 145 49 North Carolina 6231 14662 316 51 ~2 North Dakota 546 1979 33 60 17 Ohio 13525 31114 1273 94 41 Oklahoma 2765 6973 156 56 22 Oregon 1752 5013 166 95 33 Pennsylvania 8616 28221 1381 160 49 South Carolina 4123 8341 145 35 17 South Dakota 802 1674 26 43 15 Tennessee 8579 13883 312 36 22 Texas 13398 29746 -74 -05 -02 Utah 1291 2591 139 108 54 Vermont 503 1512 83 165 55 Virginia 4039 10149 229 57 23 Washington 5133 12002 700 136 58 West Virginia 1778 3954 558 314 141 Wisconsin 3398 13005 3amp5 113 30 Wyoming 373 865 05 14 08 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 19931volume14Num~r3 19

care fee schedule To simplify the presenshytation we show the case of no behavioral response beyond a 50-percent increase In fees The first column Indicates the level of 199() Medicaid spending on the sershyvices we assume to be affected by Medicshyaid fee changes These are physician sershyvices hospital inpatient and outpatient care and prescription drugs for children non-elde~y adults the blind and the disshyabled Unaffected services include nursshying home care home health care dental services and so forth We also assume that all services used by the elderly are unaffected because of Medicare covershyage The second column presents total Medicaid spending for all services for all groups In each State The third column contains our projected change In expenshyditures following adoption of the MFS The fourth column shows the projected percent increase relative to current spending on the affected services The fifth column provides the estimated pershycent increase relative to all Medicaid spending in the State

The table demonstrates that the impact va~es considerably across States In two States expenditures are projected to deshycline The largest Increases would be In Mississippi (146 percent) and West Virshyginia (141 percent) The increases by State depend on both the percent inshycrease in Medicaid fees and the Imporshytance of physician services In the overall spending by each State The fourth colshyumn Indicates the percent increase relashytive to current spending on affected sershyvices For these services expenditures would Increase by 314 percent In West Virginia 274 percent in Mississippi and by 140-160 percent in large States such as Pennsylvania Maryland New Jersey New York and Illinois

The rest of our discussion provides more detail on these results First Table 5 provides information on the increases in Medicaid fees that would be required In each State to increase them to the MFS On average States would be faced with a 486-percent increase in fees Because Medicaid fees vary considerably across States the impact of adopting the MFS also varies widely The results indicate that five States (West Virginia New York New Jersey Pennsylvania and Missoun) would have more than a twofold increase in their average fee levels Many other States would have fee increases of more than 50 percent The two States (Texas and Alaska) with Medicaid fee levels above Medicare levels in 1990would actushyally reduce fees

Most of the increases in fees would come In primary care services and hospishytal visits Primary care services would inshycrease on average by 661 percent and fees for hospital visits would double On the other hand fees for obstet~cal care would actually come down on average Our survey results indicate that only 14 States had fees for obstetrical services lower than the levels In the new MFS Surshygical fees would also be relatively unafshyfected on average In many States there would be significant decreases In Medicshyaid fees to bring them in line with Medishycare levels Other States would experishyence some increase

Table 6 examines the percent increase in US Medicaid expenditures for each afshyfected service (hospital inpatient care outpatient services prescription drugs and physician services) for children adults the blind and the disabled Recall that estimates for the blind and the disshyabled used the elasticity estimates for the adult population The results (under the

Health Care Financing Review1Sprlng1993volume 14 Number3 20

Table 5 Percent Increases in Medicaid Fees Required to Equal the New Medicare Fee Schedule by

Type of Service Percent Increase Fiscal Year 1990

State All Fees Primary ca Hospital

VIsits Obstetrics Surgery laboratory

Tests Imaging

Percent All 486 661 1050 -64 95 318 346

Alabama 390 635 842 -231 -111 231 311 Alaska -133 -71 -187 -179 -560 75 -06 Arkansas 39 75 78 -11 -215 126 71 California 564 816 787 75 129 144 502 Colorado 349 475 790 -155 247 -70 389 Connecticut 620 921 937 -68 62 343 694 Delaware 008 1079 565 32 10 250 165 District of Columbia 573 796 1417 -381 330 1264 411 Florida 186 433 182 -74 -42 39 -242 Georgia Hawaii

18 259

285 282

41 227

-433 429

-474 -296

-126 308

80 155

Idaho 218 408 614 -361 -05 137 199 Illinois 795 847 1723 -91 98 453 1754 Indiana 23 118 142 -121 -462 -237 92 Iowa 292 485 655 -99 -268 249 87 Kansas 541 488 2319 -25 21 101 -157 Kentucky Louisiana

402 90

728 280

880 246

-272 -421

-184 -12

143 16

83 201

Maine 790 946 1632 -55 723 146 899 Maryland Massachusetts

966 109

1024 58

2917 552

-410 -302

840 -41

202 302

1175 713

Michigan Minnesota

749 225

762 382

1652 343

267 08

328 -227

975 330

657 51

Mississippi Missouri

974 1017

1306 1174

2489 2144

-199 227

509 835

396 253

182 655

Montana 329 450 444 77 59 -32 405 Nebraska 156 274 539 -42 -54 -128 -355 Nevada 63 151 324 -292 -337 82 331 New Hampshire 006 472 2085 -241 655 507 978 New Jersey New Mexico

1668 349

1690 433

3491 575

721 -21

1273 -176

1814 1295

1206 598

New York 2290 2426 5916 -104 2104 4934 1158 North Carolina 267 501 510 -196 -209 42 192 North Dakota 310 609 513 -110 -74 -29 -169 Ohio 711 884 1617 137 134 123 327 Oklahoma 342 621 572 -54 -242 -13 10 Oregon Pennsylvania South Carolina

361 1028 223

524 1494 378

006 1300

879

-135 432

-382

08 167 26

167 982 -67

313 282

68 South Dakota 240 426 240 179 -265 -13 -141 Tennessee 161 148 773 07 -246 -185 -05 Texas -21 194 290 -409 -410 -374 -319 Utah 423 525 288 272 04 215 818 vermont 546 813 924 -155 510 -17 438 Virginia Washington West Virginia Wisconsin

203 488

1834 513

478 515

2672 837

306 1254 2859

603

-242 26

160 223

-395 287 882

-186

-147 167 159 148

215 466

1185 -08

Wyoming 55 126 370 -135 -195 -108 -138 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 1993volume 14 Number3 21

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

Table 4 Percent Increase In Medicaid Expenditures by State and Nation for Children Adults the

Blind and tho Disabled (Behavioral Response Capped at 50 Percent) Percent Increase Percent

Total Increase in Relative Increase Spending in Medicaid Spending in to Current Relative

Millions Spending in Millions Spending on to Total on Affected Millions on Affected Affected Spending on

State Services 1990 1990 Services 1990 Services All Groups

All $275699 $655300 $26211 95 40

Alabama 3673 7452 181 49 24 Alaska 855 1517 -26 -30 -17 Arkansas 2425 5943 20 08 03 caJifomla 36574 64322 4676 128 73 Colorado 1920 5212 184 96 35 Connecticut 2511 11956 163 65 14 Delaware 452 1245 33 74 27 District of Columbia 1908 3919 155 81 40 Florida 11954 23846 368 31 15 Georgia 7999 15327 41 05 03 Hawaii 807 2003 64 80 32 Idaho 565 1542 33 59 ~2 Illinois 10725 23374 1533 143 88 Indiana 5415 13618 32 06 02 Iowa 2467 6101 195 79 32 Kansas 1764 4786 190 108 40 Kentucky 5161 9862 086 114 59 Louisiana 6638 13620 113 17 08 Maine 1251 4181 212 170 51 Maryland 5609 11058 833 149 75 Massachusetts 10542 30465 146 14 05 Michigan 13008 24360 1809 139 74 Minnesota 3481 14188 25 07 02 Mississippi 3173 5929 868 274 146 Missouri 3429 8624 316 92 37 Montana 699 1877 61 87 32 Nebraska 1108 3071 45 40 15 Neada 887 1448 12 17 08 New Hampshire 429 2204 45 104 20 New Jersey 9338 23602 1385 148 59 New Mexico 1497 2881 143 96 50 New York 40985 120308 5935 145 49 North Carolina 6231 14662 316 51 ~2 North Dakota 546 1979 33 60 17 Ohio 13525 31114 1273 94 41 Oklahoma 2765 6973 156 56 22 Oregon 1752 5013 166 95 33 Pennsylvania 8616 28221 1381 160 49 South Carolina 4123 8341 145 35 17 South Dakota 802 1674 26 43 15 Tennessee 8579 13883 312 36 22 Texas 13398 29746 -74 -05 -02 Utah 1291 2591 139 108 54 Vermont 503 1512 83 165 55 Virginia 4039 10149 229 57 23 Washington 5133 12002 700 136 58 West Virginia 1778 3954 558 314 141 Wisconsin 3398 13005 3amp5 113 30 Wyoming 373 865 05 14 08 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 19931volume14Num~r3 19

care fee schedule To simplify the presenshytation we show the case of no behavioral response beyond a 50-percent increase In fees The first column Indicates the level of 199() Medicaid spending on the sershyvices we assume to be affected by Medicshyaid fee changes These are physician sershyvices hospital inpatient and outpatient care and prescription drugs for children non-elde~y adults the blind and the disshyabled Unaffected services include nursshying home care home health care dental services and so forth We also assume that all services used by the elderly are unaffected because of Medicare covershyage The second column presents total Medicaid spending for all services for all groups In each State The third column contains our projected change In expenshyditures following adoption of the MFS The fourth column shows the projected percent increase relative to current spending on the affected services The fifth column provides the estimated pershycent increase relative to all Medicaid spending in the State

The table demonstrates that the impact va~es considerably across States In two States expenditures are projected to deshycline The largest Increases would be In Mississippi (146 percent) and West Virshyginia (141 percent) The increases by State depend on both the percent inshycrease in Medicaid fees and the Imporshytance of physician services In the overall spending by each State The fourth colshyumn Indicates the percent increase relashytive to current spending on affected sershyvices For these services expenditures would Increase by 314 percent In West Virginia 274 percent in Mississippi and by 140-160 percent in large States such as Pennsylvania Maryland New Jersey New York and Illinois

The rest of our discussion provides more detail on these results First Table 5 provides information on the increases in Medicaid fees that would be required In each State to increase them to the MFS On average States would be faced with a 486-percent increase in fees Because Medicaid fees vary considerably across States the impact of adopting the MFS also varies widely The results indicate that five States (West Virginia New York New Jersey Pennsylvania and Missoun) would have more than a twofold increase in their average fee levels Many other States would have fee increases of more than 50 percent The two States (Texas and Alaska) with Medicaid fee levels above Medicare levels in 1990would actushyally reduce fees

Most of the increases in fees would come In primary care services and hospishytal visits Primary care services would inshycrease on average by 661 percent and fees for hospital visits would double On the other hand fees for obstet~cal care would actually come down on average Our survey results indicate that only 14 States had fees for obstetrical services lower than the levels In the new MFS Surshygical fees would also be relatively unafshyfected on average In many States there would be significant decreases In Medicshyaid fees to bring them in line with Medishycare levels Other States would experishyence some increase

Table 6 examines the percent increase in US Medicaid expenditures for each afshyfected service (hospital inpatient care outpatient services prescription drugs and physician services) for children adults the blind and the disabled Recall that estimates for the blind and the disshyabled used the elasticity estimates for the adult population The results (under the

Health Care Financing Review1Sprlng1993volume 14 Number3 20

Table 5 Percent Increases in Medicaid Fees Required to Equal the New Medicare Fee Schedule by

Type of Service Percent Increase Fiscal Year 1990

State All Fees Primary ca Hospital

VIsits Obstetrics Surgery laboratory

Tests Imaging

Percent All 486 661 1050 -64 95 318 346

Alabama 390 635 842 -231 -111 231 311 Alaska -133 -71 -187 -179 -560 75 -06 Arkansas 39 75 78 -11 -215 126 71 California 564 816 787 75 129 144 502 Colorado 349 475 790 -155 247 -70 389 Connecticut 620 921 937 -68 62 343 694 Delaware 008 1079 565 32 10 250 165 District of Columbia 573 796 1417 -381 330 1264 411 Florida 186 433 182 -74 -42 39 -242 Georgia Hawaii

18 259

285 282

41 227

-433 429

-474 -296

-126 308

80 155

Idaho 218 408 614 -361 -05 137 199 Illinois 795 847 1723 -91 98 453 1754 Indiana 23 118 142 -121 -462 -237 92 Iowa 292 485 655 -99 -268 249 87 Kansas 541 488 2319 -25 21 101 -157 Kentucky Louisiana

402 90

728 280

880 246

-272 -421

-184 -12

143 16

83 201

Maine 790 946 1632 -55 723 146 899 Maryland Massachusetts

966 109

1024 58

2917 552

-410 -302

840 -41

202 302

1175 713

Michigan Minnesota

749 225

762 382

1652 343

267 08

328 -227

975 330

657 51

Mississippi Missouri

974 1017

1306 1174

2489 2144

-199 227

509 835

396 253

182 655

Montana 329 450 444 77 59 -32 405 Nebraska 156 274 539 -42 -54 -128 -355 Nevada 63 151 324 -292 -337 82 331 New Hampshire 006 472 2085 -241 655 507 978 New Jersey New Mexico

1668 349

1690 433

3491 575

721 -21

1273 -176

1814 1295

1206 598

New York 2290 2426 5916 -104 2104 4934 1158 North Carolina 267 501 510 -196 -209 42 192 North Dakota 310 609 513 -110 -74 -29 -169 Ohio 711 884 1617 137 134 123 327 Oklahoma 342 621 572 -54 -242 -13 10 Oregon Pennsylvania South Carolina

361 1028 223

524 1494 378

006 1300

879

-135 432

-382

08 167 26

167 982 -67

313 282

68 South Dakota 240 426 240 179 -265 -13 -141 Tennessee 161 148 773 07 -246 -185 -05 Texas -21 194 290 -409 -410 -374 -319 Utah 423 525 288 272 04 215 818 vermont 546 813 924 -155 510 -17 438 Virginia Washington West Virginia Wisconsin

203 488

1834 513

478 515

2672 837

306 1254 2859

603

-242 26

160 223

-395 287 882

-186

-147 167 159 148

215 466

1185 -08

Wyoming 55 126 370 -135 -195 -108 -138 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 1993volume 14 Number3 21

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

care fee schedule To simplify the presenshytation we show the case of no behavioral response beyond a 50-percent increase In fees The first column Indicates the level of 199() Medicaid spending on the sershyvices we assume to be affected by Medicshyaid fee changes These are physician sershyvices hospital inpatient and outpatient care and prescription drugs for children non-elde~y adults the blind and the disshyabled Unaffected services include nursshying home care home health care dental services and so forth We also assume that all services used by the elderly are unaffected because of Medicare covershyage The second column presents total Medicaid spending for all services for all groups In each State The third column contains our projected change In expenshyditures following adoption of the MFS The fourth column shows the projected percent increase relative to current spending on the affected services The fifth column provides the estimated pershycent increase relative to all Medicaid spending in the State

The table demonstrates that the impact va~es considerably across States In two States expenditures are projected to deshycline The largest Increases would be In Mississippi (146 percent) and West Virshyginia (141 percent) The increases by State depend on both the percent inshycrease in Medicaid fees and the Imporshytance of physician services In the overall spending by each State The fourth colshyumn Indicates the percent increase relashytive to current spending on affected sershyvices For these services expenditures would Increase by 314 percent In West Virginia 274 percent in Mississippi and by 140-160 percent in large States such as Pennsylvania Maryland New Jersey New York and Illinois

The rest of our discussion provides more detail on these results First Table 5 provides information on the increases in Medicaid fees that would be required In each State to increase them to the MFS On average States would be faced with a 486-percent increase in fees Because Medicaid fees vary considerably across States the impact of adopting the MFS also varies widely The results indicate that five States (West Virginia New York New Jersey Pennsylvania and Missoun) would have more than a twofold increase in their average fee levels Many other States would have fee increases of more than 50 percent The two States (Texas and Alaska) with Medicaid fee levels above Medicare levels in 1990would actushyally reduce fees

Most of the increases in fees would come In primary care services and hospishytal visits Primary care services would inshycrease on average by 661 percent and fees for hospital visits would double On the other hand fees for obstet~cal care would actually come down on average Our survey results indicate that only 14 States had fees for obstetrical services lower than the levels In the new MFS Surshygical fees would also be relatively unafshyfected on average In many States there would be significant decreases In Medicshyaid fees to bring them in line with Medishycare levels Other States would experishyence some increase

Table 6 examines the percent increase in US Medicaid expenditures for each afshyfected service (hospital inpatient care outpatient services prescription drugs and physician services) for children adults the blind and the disabled Recall that estimates for the blind and the disshyabled used the elasticity estimates for the adult population The results (under the

Health Care Financing Review1Sprlng1993volume 14 Number3 20

Table 5 Percent Increases in Medicaid Fees Required to Equal the New Medicare Fee Schedule by

Type of Service Percent Increase Fiscal Year 1990

State All Fees Primary ca Hospital

VIsits Obstetrics Surgery laboratory

Tests Imaging

Percent All 486 661 1050 -64 95 318 346

Alabama 390 635 842 -231 -111 231 311 Alaska -133 -71 -187 -179 -560 75 -06 Arkansas 39 75 78 -11 -215 126 71 California 564 816 787 75 129 144 502 Colorado 349 475 790 -155 247 -70 389 Connecticut 620 921 937 -68 62 343 694 Delaware 008 1079 565 32 10 250 165 District of Columbia 573 796 1417 -381 330 1264 411 Florida 186 433 182 -74 -42 39 -242 Georgia Hawaii

18 259

285 282

41 227

-433 429

-474 -296

-126 308

80 155

Idaho 218 408 614 -361 -05 137 199 Illinois 795 847 1723 -91 98 453 1754 Indiana 23 118 142 -121 -462 -237 92 Iowa 292 485 655 -99 -268 249 87 Kansas 541 488 2319 -25 21 101 -157 Kentucky Louisiana

402 90

728 280

880 246

-272 -421

-184 -12

143 16

83 201

Maine 790 946 1632 -55 723 146 899 Maryland Massachusetts

966 109

1024 58

2917 552

-410 -302

840 -41

202 302

1175 713

Michigan Minnesota

749 225

762 382

1652 343

267 08

328 -227

975 330

657 51

Mississippi Missouri

974 1017

1306 1174

2489 2144

-199 227

509 835

396 253

182 655

Montana 329 450 444 77 59 -32 405 Nebraska 156 274 539 -42 -54 -128 -355 Nevada 63 151 324 -292 -337 82 331 New Hampshire 006 472 2085 -241 655 507 978 New Jersey New Mexico

1668 349

1690 433

3491 575

721 -21

1273 -176

1814 1295

1206 598

New York 2290 2426 5916 -104 2104 4934 1158 North Carolina 267 501 510 -196 -209 42 192 North Dakota 310 609 513 -110 -74 -29 -169 Ohio 711 884 1617 137 134 123 327 Oklahoma 342 621 572 -54 -242 -13 10 Oregon Pennsylvania South Carolina

361 1028 223

524 1494 378

006 1300

879

-135 432

-382

08 167 26

167 982 -67

313 282

68 South Dakota 240 426 240 179 -265 -13 -141 Tennessee 161 148 773 07 -246 -185 -05 Texas -21 194 290 -409 -410 -374 -319 Utah 423 525 288 272 04 215 818 vermont 546 813 924 -155 510 -17 438 Virginia Washington West Virginia Wisconsin

203 488

1834 513

478 515

2672 837

306 1254 2859

603

-242 26

160 223

-395 287 882

-186

-147 167 159 148

215 466

1185 -08

Wyoming 55 126 370 -135 -195 -108 -138 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 1993volume 14 Number3 21

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

Table 5 Percent Increases in Medicaid Fees Required to Equal the New Medicare Fee Schedule by

Type of Service Percent Increase Fiscal Year 1990

State All Fees Primary ca Hospital

VIsits Obstetrics Surgery laboratory

Tests Imaging

Percent All 486 661 1050 -64 95 318 346

Alabama 390 635 842 -231 -111 231 311 Alaska -133 -71 -187 -179 -560 75 -06 Arkansas 39 75 78 -11 -215 126 71 California 564 816 787 75 129 144 502 Colorado 349 475 790 -155 247 -70 389 Connecticut 620 921 937 -68 62 343 694 Delaware 008 1079 565 32 10 250 165 District of Columbia 573 796 1417 -381 330 1264 411 Florida 186 433 182 -74 -42 39 -242 Georgia Hawaii

18 259

285 282

41 227

-433 429

-474 -296

-126 308

80 155

Idaho 218 408 614 -361 -05 137 199 Illinois 795 847 1723 -91 98 453 1754 Indiana 23 118 142 -121 -462 -237 92 Iowa 292 485 655 -99 -268 249 87 Kansas 541 488 2319 -25 21 101 -157 Kentucky Louisiana

402 90

728 280

880 246

-272 -421

-184 -12

143 16

83 201

Maine 790 946 1632 -55 723 146 899 Maryland Massachusetts

966 109

1024 58

2917 552

-410 -302

840 -41

202 302

1175 713

Michigan Minnesota

749 225

762 382

1652 343

267 08

328 -227

975 330

657 51

Mississippi Missouri

974 1017

1306 1174

2489 2144

-199 227

509 835

396 253

182 655

Montana 329 450 444 77 59 -32 405 Nebraska 156 274 539 -42 -54 -128 -355 Nevada 63 151 324 -292 -337 82 331 New Hampshire 006 472 2085 -241 655 507 978 New Jersey New Mexico

1668 349

1690 433

3491 575

721 -21

1273 -176

1814 1295

1206 598

New York 2290 2426 5916 -104 2104 4934 1158 North Carolina 267 501 510 -196 -209 42 192 North Dakota 310 609 513 -110 -74 -29 -169 Ohio 711 884 1617 137 134 123 327 Oklahoma 342 621 572 -54 -242 -13 10 Oregon Pennsylvania South Carolina

361 1028 223

524 1494 378

006 1300

879

-135 432

-382

08 167 26

167 982 -67

313 282

68 South Dakota 240 426 240 179 -265 -13 -141 Tennessee 161 148 773 07 -246 -185 -05 Texas -21 194 290 -409 -410 -374 -319 Utah 423 525 288 272 04 215 818 vermont 546 813 924 -155 510 -17 438 Virginia Washington West Virginia Wisconsin

203 488

1834 513

478 515

2672 837

306 1254 2859

603

-242 26

160 223

-395 287 882

-186

-147 167 159 148

215 466

1185 -08

Wyoming 55 126 370 -135 -195 -108 -138 SOURCE Urban Institute simulations

Health Care Financing ReviewSpring 1993volume 14 Number3 21

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

Table 6 Increases In Medicaid Expenditures From Adopting Medicare Fee Schedule by Service

Using Alternative Assumptions of Behavioral Response Increase Percent Increase Percent

in Medicaid Increase in Medicaid Increase Increase Percent Expenditures In Medicaid Expenditures In Medicaid in Medicaid Increase

in Billions Expenditures In Billions Expenditures Expenditures in Medicaid with 33 with 33 with 50 with 50 in Billions Expenditures

Service Percent cap Percent Cap Percent Cap Percent Cap With No Cap with No Cap

All Services $25 92 $26 95 $29 104 26 589 27 612 30 685

-06 -39 -09 -55 -19 -117 03 62 04 87 09 198

50-percent behavioral response assumpmiddot tion) indicate spending on all affected sermiddot vices would increase by 95 percent As shown earlier the percent increase in all Medicaid expenditures would be somemiddot what lower 40 percent The effect on physician services would be substantially greater On average we estimate physlmiddot cian expenditures to Increase by 612 pershycent Physician expenditures would more than double in Maryland Mississippi Missouri New Jersey New York Pennshysylvania and West Virginia States that actually would reduce their fees are proshyjected to have small reductions in their expenditures for physician services

DISCUSSION

This study examines the effects on Federal and State Medicaid expenditures of increasing Medicaid physician fees to levels specified under the MFS The analmiddot ysis uses data from a new survey of State Medicaid physician fees and estimates from a behavioral response model to estimiddot mate the effects Three potential limitashytions of the analysis should be noted First because the behavioral response model is based on data from three States the models results may not be generalizshyable to all States However the model

does control for State-specific factors Second the simulation applies the behavmiddot ioral response model for adults to the dismiddot abled Medicaid population Although this may bias the results the direction of the bias is unclear Third the analysis applies the behavioral response models crossshysectional results to longitudinal changes Because the cross-sectional results deshyscribe long-term equilibrium effects the simulation may overstate the short-term impacts of increasing fees

The analysis Indicates that adopting the MFS would increase Medicaid expenshyditures by $25-$29 billion The costs of adopting the MFS depend on how the polmiddot icy is implemented For example data from our survey of Medicaid physician fees suggest that Medicaid currently pays higher fees for obstetrical proceshydures than would be the case under the MFS in all but 14 States Permitting States to continue to pay higher fee levels would increase costs by approximately another $1 billion On the other hand the costs of increasing Medicaid fees would be lower if Medicaid programs were only required to increase fees to 90 percent of theMFS

Many of the largest effects would be in wealthier and more populous States Calimiddot

Health care Financing RevlewiSprlng 1993Volume 14 Number3 22

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23

fornla Maryland Michigan New York New Jersey Pennsylvania and Illinois would all experience increases in total Medicaid expenditures of 5 percent or more These States would have to bear more than one-half of the Increased costs because of their matching rate But the efmiddot feels would also be large in some smaller and poorer States The largest effects for example would be In Mississippi (146 percent) and West Virginia (141 percent) Kentucky Maine Utah Vermont and Washington would also face increases of greater than 5 percent The Federal Govmiddot ernment would be financially responsible for much more than one-half of the inmiddot creased costs in these States however

Although the costs of increasing Medmiddot icald fees to Medicare levels are not trivmiddot lal there are potential benefits The literashyture strongly indicates that Increasing fees will increase physician participation (eg Held and Holahan 1985 Mitchell 1991 Sloan Mitchell and Cromwell 1978) To the extent that greater partlcipamiddot lion by physicians improves Medicaid enmiddot rollees access to care encourages utilimiddot zatlon of appropriate services andor Improves quality of care the potential benefits are significant Given that the goal of a policy of increasing fees is to immiddot prove access these results are encouragmiddot ing

REFERENCES

Cohen JW Medicaid Policy and the Substitushytion of Hospital Outpatient Care for Physician Care Health Setvlces Research 241)33-e6 April 1989 Cohen JW Medicaid Physician Fees and Use of Physician and Inpatient Hospital Services Unpubshylished doctoral dissertation Chicago University of Chlcago1991

Federal Register Medicare Program Fee Schedmiddot ule for Physician Services Vol 56 No 227 59580shy59784 Office of the Federal Register National Arshychives and Records Administration Washington US Government Printing Office November 25 1991 Held PJ and Holahan J Containing Medicaid costs In an era of growing physician supply Health Care Financing Review 7(1)49-60 Fall 1985

Holahan J Medicaid Physician Fees 1990 The Results of a New Sutvey Urban Institute Working Paper 611001 Washington DC The Urban Instishytute 1991

Long SH SOttle RF and Stuart BC Relmburmiddot sement and Access to Physicians Services Under Medicaid Journal of Health Economics 5(3)235shy251S0ptember5 1986 Mitchell JB Physician Participation in Medicaid Revisited Medical care 29(7)645-653 July 1991 Pepper Commission (US Bipartisan Commission on Comprehensive Health Care) A Gall for Acshytion Final Report Washington DC US Governshyment Printing Office September 1990

Sloan F Mitchell J and Cromwell J Physician Participation in State Medicaid Programs Journal of Human Resources 13 (Supplement) 211-245 1978 Thorpe KE Siegel JE and Dailey T Including the Poor The Fiscal Impacts of Medicaid Expanshysion Journal of the American Medical Associashytion 261(7)1()()31007 February 17 1989 Wade M Medicaid Fee Levels and Medicaid Enshyrollees Access to care Urban Institute Working Papor611002 Washington DC The Urban lnstlmiddot lute July 1992

Reprint requests John Holahan PhD Health Polley Center The Urban Institute 2100 M Street NW Washington DC 20037

Health Care Financing RevlewSprlng 1993volume 14 Number3 23