Pricing Innovation in Surgical Care Markets

Technological innovation in medical services can improve health, but its ability to reach patients often depends on price signals for downstream providers, which can also be discordant across production inputs. We examine such a context when Medicare sharply revises facility fees—while holding physician fees constant—for advanced surgical care performed within certain outpatient settings. Industry-wide output for impacted cases increases via market expansion, and indirectly affected physicians devote more labor supply to these cases by sacrificing other outpatient and inpatient surgical volumes. Government price setting for healthcare facilities spills over onto physicians––impacting their technology utilization and time allocations.