Lower Medicaid Fees Lead to Fewer Cesarean Births

The cesarean delivery rate rises by 3.9 percent for each $100 increase in fees.

Medicare expenditures have soared by 250 percent over the past decade to $203 billion in 1996. Medicaid has grown by 400 percent to $148 billion. These two giant programs accounted for nearly a third of the growth in the federal budget over that time span. No wonder policymakers feel an intense pressure to reign in costs, especially with the aging of the population. So far, efforts to control both Medicare and Medicaid costs have centered largely on provider reimbursement, such as physician fees.

In the past, studies of Medicare have been concerned mostly with the effect of controlling fees on the quality of care. Studies of Medicaid have focused more on the impact of curbing fees on patient access. Yet it would be a mistake to simply apply the findings of the Medicare studies--that doctors increase treatment intensity to compensate for lower fees--to Medicaid, according to NBER Research Associate Jonathan Gruber and his co-authors Dina Mayzlin and John Kim.

In Physician Fees and Procedure Intensity: The Case of Cesarean Delivery (NBER Working Paper No. 6744) , they suggest that the opposite finding seems to hold true. Here's why: Some doctors tend to specialize in Medicare and, therefore, "income effects" dominate their reaction to lower fees: that is, they work more to make up for the lost income when fees decline. But Medicaid patients are a smaller part of a physician's patient pool than are Medicare patients. So, it is possible that "substitution effects" will dominate in the case of Medicaid fee changes. Thus lowering fees will lower treatment intensity, the authors write.

That's just what they find in their analysis of cesarean births under Medicaid. Cesarean births offer two advantages for study: first, the underlying costs of the procedure measured in physician time and intensity are similar to those for vaginal delivery, but reimbursement is higher for cesareans. Second, there is state-by-state variation in how much Medicaid programs will reimburse physicians for cesareans.

The researchers discover that, on net, fee differentials have a strong positive effect on the use of cesarean delivery. In absolute terms, they estimate that the cesarean delivery rate rises by 3.9 percent for each $100 increase in fees; normalizing by private insurance fees, they find that each 10 percent rise in the cesarean rate relative to the private vaginal delivery rate leads to an 8.4 percent increase in cesarean births.

Even more striking is the authors' calculation of the effect of fees on cesarean rates in Medicaid versus private health insurance coverage. Medicaid's lower fee differential between cesarean and vaginal childbirth compared to the differential in private insurance plans explains between one-half and three-quarters of the difference between Medicaid and private cesarean rates.

-- Christopher Farrell