A large and important literature has investigated the effect of prices in financing health care in the United States.1–4 However, an equally important feature of health care financing is the set of rules that determine what services will be paid for and how services will be categorized for reimbursement. While public and private insurers use a uniform system of coding to reimburse health care services, there exists wide variation in whether services billed for a given code will be considered “reasonable and necessary,” with largely unknown consequences.5–8
This project aims to study the effect of rules on utilization, costs, and patient outcomes within the setting of Medicare, using natural variation due to Local Coverage Determinations (LCDs). LCDs are coverage rules, developed and administered locally by Medicare Administrative Contractors (MACs), that describe conditions under which a service will be considered reimbursable by a MAC. In preliminary work, we have found incredible variation in the number and stringency of LCDs across states and time, depending on the MAC responsible for a jurisdiction and on the geographic boundaries of jurisdictions that change over time. This provides a rich setting to study questions on how providers respond to changes in reimbursement policy, which are relevant not only for Medicare payment but also more generally for the design of any financing system that reimburses providers for services.