Physician volume response to price controls.

The need to contain escalating health care costs is one of the major challenges facing health care systems today. It is often argued that price control is an effective tool for reducing both the level and the rate of growth in health spending. However, experience suggests that these savings may be partially offset by volume increases. These are initiated by providers, particularly physicians, who attempt to provide more health care goods and services in order to recapture lost revenues. This phenomenon is called the behavioral offset or volume response. This paper examines the physician behavioral response to the fee reductions at the practice level using the data from the U.S. Medicare program in 1989 and 1990. This is the most recent data currently available at the practice level for the Medicare program at this writing. This period of time corresponds to the fee reductions mandated by the Omnibus Budget Reconciliation Act of 1989 (OBRA89). The results show that the volume of services whose fees were cut by OBRA89 increased by 3.7% for every 10% fee reduction. This means that, for every dollar cut in their fees, physicians would recoup 37 cents by increasing volume. The presence of a volume response suggests that price control alone is not sufficient to cap rising health care costs. This indicates that additional or other tools must be considered if cost containment is to be attained.