We investigate the hypothesis that increasing access for the indigent to physicians' offices shifts care from hospital outpatient settings and lowers Medicaid costs (the so-called "offset effect"). To evaluate this hypothesis we exploit a large increase in physician fees in the Tennessee Medicaid program, using Georgia as a control. We find that beneficiaries shifted care from clinics to offices, but that there was little or no shifting from hospital outpatient departments or emergency rooms. Thus, we find no offset effect in outpatient expenditures. Inpatient admissions and expenditures fell, reducing overall program spending 8 percent. Because the inpatient reduction did not occur in ambulatory-care-sensitive diagnoses, however, we cannot demonstrate a causal relationship with the fee change.
