Inpatient, Outpatient, and the “Doc Fix”

An experience I had this week got me to thinking so I did a bit of research and I thought I’d share the fruits of my labors. As you presumably know, Medicare consists of several funds, those most frequently seen being Medicare Part A which pays hospitals, Medicare Part B which pays physicians, Medicare Part C (Medicare Advantage), and Medicare Part D, the drug benefit enacted during the Bush Administration. Here’s a graph illustrating the growth in Part A (the dark blue line) and Parts B and D (the light blue line) from 1990 to 2007:

This particular graph illustrates the increase in dollar spending. My next graph illustrates the estimated percentage growth rates of the four funds:

As you can see Medicare Part B is growing much faster than Medicare Part A and, since (as is illustrated by the first graph) Parts B and D are already larger than Part A, as Parts B and D grow, so does Medicare spending overall. You might also note that, just by coincidence, the point at which Part B really began to take off is just a bit after Congress’s plan to control the increasing cost of Medicare through establish a sustainable Medicare Growth Rate really began to bite (the law was enacted in 1997). The first “doc fix”, the adjustment to compensation rates for Part B, essentially absolving Part B from the SGR took place in 2002 and the rest, as they say, is history.

This is the part that I found interesting:

This very interesting graph is from this post by Maggie Mahar.

As you can see outpatient visits (the Medicare portion of which are reimbursed from Part B) are increasing much faster than inpatient visits (which are reimbursed from Part A). Or, said another way, incentives matter.

I am not claiming that all of Medicare’s problems are caused by doctors. Nor am I claiming that the sole reason that outpatient visits are increasing so rapidly is that they’re not being subjected to as the degree of cost control that inpatient visits are. What I’m saying is:

  1. Like bankers or stockbrokers, physicians are profit-maximizing.
  2. The profit motive is at least part of the reason for the increasing use of outpatient procedures.
  3. Without reducing the rate of growth in Part B, i.e. reducing the “doc fixes”, there’s no hope of controlling the increasing cost of Medicare.
4 comments… add one
  • steve

    Frakt recently had two good pieces on Supplier Induced Demand. For some reason, many people deny it exists. Clearly it does. It is very easy to get patients to spend more. However, it probably also exists just because of the agency problem in determining what services to use. The physician recommends and provides (often) the service. There is no way for the doc to truly reflect patient preferences.

    While physician fees under Medicare have been close to stagnant, Medicare spending has increased faster than inflation. Reducing utilization is much more important than reducing fees.


  • My wife is actually looking at making a transition away from clinic work (outpatient) to being a hospitalist (inpatient). Despite the rates of cost growth in inpatient vs outpatient, the latter actually pays better than the former and pay is growing at a much faster rate (that’s not why she’s doing it, though). It’s weird that with the run-up in outpatient procedures, you’d think that clinicians in particular would be making a mint right now. Not that they are doing poorly, mind you, but it’s… not exactly where the money is.

  • steve

    Outpatient procedures mostly means imaging, chemo and surgical procedures. Not much there for general internists. I think there is still a supply shortage for hospitalists, especially those who can manage ICU patients. That is driving salaries.


  • Supplier Induced Demand

    I don’t think that’s a completely accurate term. Better would be “supplier-induced consumption”.

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