The Extent of Externalities From Medicare Payment Policy

Medicare, accounts for roughly 20% of medical expenditures in the United States and is the dominant payer for many treatments. Consequently, Medicare payment policy may have diffuse consequences. Using a contemporary bundled payment reform (the “CJR” program) and a difference-in-differences research design, we estimate Medicare's spillover reach. We find that altered treatment decisions for targeted joint replacement procedures are closely, though not perfectly, mirrored between traditional Medicare, Medicare Advantage, and the non-elderly commercially insured populations. Results for untargeted procedures performed by CJR affected providers also show suggestive evidence consistent with a secondary spillover effect. Our collage of findings aligns with the “norms hypothesis” for provider decision-making; however, providers do not rigidly apply changes to treatment choices. Instead, key decision nodes appear to gain greater salience under Medicare's new incentive structure, which leads to revised treatment choices for different payer-procedure combinations. Ignoring the breadth of externalities from Medicare policies risks understating their social welfare impact