When (and Why) Providers Do Not Respond to Changes in Reimbursement Rates

Policies to reduce health care payments can lead to health care access issues if providers reduce their supply in response to reimbursement rate reductions. We examine the impact of reimbursement rates on health care supply by studying a policy that reduced reimbursement rates by 30% in a large workers’ compensation insurance system. Despite the decrease in reimbursement rates, the policy did not affect health care utilization or outcomes. Our estimates suggest the policy reduced annual workers’ compensation medical costs by over $400 million and indicate that providers are operating on the inelastic portion of the supply curve for services paid for by high-reimbursing payers.