Reducing Public Expenditures for Physician Services: The Price of Paying Less

The purpose of this paper is to examine how physicians respond to changes in payment levels from government insurers. Our analysis focuses on two issues: controlling overall program expenditures, and assuring full access to care for program clients. We review evidence from natural experiments in which payment levels were increased, frozen, or decreased. These studies show that freezing or reducing payment levels is not effective in controlling program expenditures, because physicians responded by increasing the quantity and complexity of services provided. Furthermore, when government programs freeze or reduce their payment levels, physicians are less likely to treat the clients of these programs. We conclude that policymakers must seek alternative strategies for controlling program expenditures.