NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Timea Laura Molnar

Vancouver School of Economics
University of British Columbia
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NBER Working Papers and Publications

October 2015The Anatomy of Physician Payments: Contracting Subject to Complexity
with Jeffrey Clemens, Joshua D. Gottlieb: w21642
Why do private insurers closely link their physician payment rates to the Medicare fee schedule despite its well-known limitations? We ask to what extent this relationship reflects the use of Medicare's relative price menu as a benchmark, in order to reduce transaction costs in a complex pricing environment. We analyze 91 million claims from a large private insurer, which represent $7.8 billion in spending over four years. We estimate that 75 percent of services, accounting for 55 percent of spending, are benchmarked to Medicare's relative prices. The Medicare-benchmarked share is higher for services provided by small physician groups. It is lower for capital-intensive treatment categories, for which Medicare's average-cost reimbursements deviate most from marginal cost. When the insurer d...
 
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