Medicare Inpatient Physician Charges: An Econometric Analysis

To control Medicare physician payments, Congress in 1989 established volume performance standards (VPS) that tie future physician fee increases to the growth in expenditures per beneficiary. The VPS risk pool is nationwide, and many observers believe it is too large to affect behavior. VPS could be modified by defining a separate risk pool for inpatient physician services and placing each hospital medical staff at risk for those services. Using a national random sample of 500,000 Medicare admissions, we explore the determinants of medical staff charges and comment on the policy implications. Multivariate analysis shows that charges increase with case mix and bed size but, surprisingly, decrease with the level of teaching activity. The teaching result is explained by the substitution of residents for physicians in these hospitals.