Effects of the Relative Fee Structure on the Use of Surgical Operations

Published in: Health Services Research, v. 28, no. 4, Oct. 1993, p. 479-502

Posted on RAND.org on December 31, 1992

by Jose J. Escarce

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The goal of this paper is to develop a theoretical and empirical framework for investigating how the demand for an operation may be affected by the fee for the operation (the own-price) and by fees for other services provided by surgeons in the same specialty (the cross-price). The theory suggests an empirical test of whether surgeons create demand for surgery. The study examines the use of 11 frequently performed surgical operations by elderly Medicare enrollees in a cross-section of 316 U.S. metropolitan areas. Medicare physician claims and enrollment files for 1986 are the principal sources of data. Using econometric methods, a structural demand equation modified to include the own-price and the cross-price is estimated for each study operation. The theory suggests that the utilization response to changes in fees may differ among operations depending on whether demand creation occurs and on the interplay of distinct own-price and cross-price effects. However, the results of the empirical analyses are inconclusive regarding the most appropriate economic model of surgical utilization. Both neoclassical behavior and demand creation are observed, but technical limitations of the analyses, including the cross-sectional design of the study, preclude definitive inferences. Despite the lack of definitive empirical results, the study has several implications for future research regarding the effect of changes in fees on surgical utilization. In particular, future studies should consider the roles of distinct own-price and cross-price effects, examine the importance of the supply-demand balance in physician services markets, and assess whether typologies of operations that are based on the strictness of their clinical indications predict the appropriate economic model of utilization.

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