Physician Fees and Procedure Intensity: The Case of Cesarean Delivery

While there is a large literature investigating the response of treatment intensity to Medicare reimbursement differentials, there is much less work on this question for the Medicaid program. The answers for Medicare may not apply in the Medicaid context, since a smaller share of physician's patients will be Medicaid insured, so that income effects from fee changes may be dominated by substitution effects. We investigate the effect of Medicaid fee differentials on the use of cesarean delivery over the 1988-1992 period. We find, in contrast to the backward-bending supply curve implied by the Medicare literature larger fee differentials between cesarean and normal childbirth for the Medicaid program leads to higher cesarean delivery rates. In particular, we find that the lower fee differentials between cesarean and normal childbirth under the Medicaid program than under private insurance can explain between one-half and three-quarters of the difference between Medicaid and private cesarean delivery rates. Our results suggest that Medicaid reimbursement reductions can cause real reductions in the intensity with which Medicaid patients are treated.