Expect the Unexpected? Physicians’ Responses to Payment Changes

By: Mireille Jacobson, PhD, Senior Health Economist, RAND2; Joseph P. Newhouse, PhD, John D. MacArthur Professor of Health Policy and Management, Harvard University

Reducing unit prices is one possible weapon in the battle to stem rising health care spending, but this approach can have unintended consequences if utilization increases by more than prices have fallen. In this essay, Dr. Jacobson and Dr. Newhouse present findings from their recent research on how physicians have responded to reductions in Medicare payments for chemotherapy drugs. Their work documents an increase in chemotherapy use rates and a switch from the drugs whose reimbursement declined to a drug that offered a higher profit for physicians. These findings serve as a reminder to policymakers that unanticipated behavioral responses can undermine their ability to achieve savings simply through fee reductions.