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Do the Medicaid and Medicare programs compete for access to health care services? A longitudinal analysis of physician fees, 1998–2004

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As the demand for publicly funded health care continues to rise in the U.S., there is increasing pressure on state governments to ensure patient access through adjustments in provider compensation policies. This paper longitudinally examines the fees that states paid physicians for services covered by the Medicaid program over the period 1998–2004. Controlling for an extensive set of economic and health care industry characteristics, the elasticity of states’ Medicaid fees, with respect to Medicare fees, is estimated to be in the range of 0.2–0.7 depending on the type of physician service examined. The findings indicate a significant degree of price competition between the Medicaid and Medicare programs for physician services that is more pronounced for cardiology and critical care, but not hospital care. The results also suggest several policy levers that work to either increase patient access or reduce total program costs through changes in fees.

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  1. Fee-for-service compensation policies are a common approach for paying health care providers within Medicaid. Even among states that have adopted managed care methods, physician service fees continue to play an influential role in determining capitation rates and reimbursements through primary care case management programs (Zuckerman et al. 2009; Schneider et al. 2002; Norton and Zuckerman 2000).

  2. Outpatient physician services are covered under Medicare Part B, and inpatient physician services are covered under Medicare Part A. Additional plan options were created with the Balanced Budget Act of 1997, and Private Fee-for-Service plans can now have higher fees than the traditional program; see Blum et al (2007) for details.

  3. Medicaid is a means-tested welfare program that is jointly administered by both federal and state governments, while Medicare is an entitlement program that is administered by the federal government.

  4. See Tables 3 and 9 at

  5. Expenditures were adjusted by the author using the CPI in 2011 dollars. For original figures see Table 8.E1 at

  6. See section 1902(a)(30)(A) of the Social Security Act, 42 U.S.C. 1396a(a)(30)(A). The geographic area guideline was introduced with the enactment of the Omnibus Budget Reconciliation Act of 1989 (Flint 2006).

  7. Outpatient physician services are covered under Medicare Part B, and inpatient physician services are covered under Medicare Part A.

  8. A further distinction in Practice Expense RVUs is also made for whether the service was provided in a facility or non-facility setting. A non-facility setting is typically a physician’s office, while a facility setting is typically an inpatient or outpatient hospital where practice expenses are lower. In this study, we focus on the role of non-facility Medicare physician fees where applicable.

  9. In certain instances, Medicare has set a fee for a physician service that it does not actually provide to recipients.

  10. Physician costs associated with providing services to the three markets are assumed to be equal. In practice, it is possible that collection costs may vary according to the buyer (Sloan et al. 1978a, b).

  11. Since 1997, GPCIs are currently designated for 89 unique geographic localities in the U.S., and certain states have more than one locality. In practice, states do not account for a non-uniform distribution of health care production costs across localities when setting Medicaid physician fees. For instance, New York has five localities designated by Medicare, and each locality has a different GPCI assigned for each of the three RVU measures in Eq. (1) that is applied to every covered physician service; however, only one set of Medicaid physician fees is determined by the state and it is applied equally to all five of the localities. See

  12. The FMAP is the percentage of state Medicaid spending matched by the federal government. It is calculated as 1 minus 0.45 times the square of the ratio of state per capita income to national per capita income averaged over three years; and is bounded between 50 % for the highest income states and 83 % for the lowest income states.

  13. A limited set of physician services were analyzed: a follow-up hospital visit, a follow-up office visit, an inguinal hernia repair, a diagnostic dilation and curettage, a complete blood count, and an electrocardiogram.

  14. The income and resource tests each have an associated standard and methodology. A standard is a particular level, below which an individual is deemed eligible. A methodology is the way in which an individual’s income and resources are counted for the purposes of applying the standard.

  15. Independent Medicaid eligibility rules are set by the following states: Connecticut, Hawaii, Illinois, Indiana, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma, Virginia.

  16. The null hypothesis that \(\upbeta _{1}\) is equal to one is rejected (\(P<0.0001\)), which implies that transforming the outcome as the ratio of Medicaid-to-Medicare fees is not statistically supported by the data in this context.

  17. The states with a constant FMAP of 50 % for 1998-2004 were CT, IL, MD, MA, NH, NJ, and NY. See Table 9 in the appendix for details.


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The author thanks Chava Sheffield at CMS for help with acquiring the earlier Medicare data and a reviewer for helpful comments on an earlier draft.

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Correspondence to Larry L. Howard.



See Tables 7, 8 and 9.

Table 7 Descriptive statistics for Medicaid physician fees by service type
Table 8 Descriptive statistics for state characteristics
Table 9 Federal medical assistance percentages by state: 1998, 2001, and 2004

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Howard, L.L. Do the Medicaid and Medicare programs compete for access to health care services? A longitudinal analysis of physician fees, 1998–2004. Int J Health Care Finance Econ 14, 229–250 (2014).

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