NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bargaining in the Shadow of a Giant: Medicare's Influence on Private Payment Systems

Jeffrey Clemens, Joshua D. Gottlieb

NBER Working Paper No. 19503
Issued in October 2013
NBER Program(s):   AG   HE   PE   HC

We analyze Medicare's influence on private payments for physicians' services. Using a large administrative change in surgical relative to medical reimbursements, we find that private prices follow Medicare's lead. A $1 change in Medicare's relative payments moves private payments by $1.20. Results are similar when Medicare alters overall reimbursement levels. Medicare thus strongly influences both relative valuations and aggregate expenditures. Medicare's price transmission is strongest when physician groups are numerous and competitive. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. Improvements in Medicare's payment models may therefore be public goods.

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This paper was revised on February 7, 2014

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Document Object Identifier (DOI): 10.3386/w19503

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