Do Physicians Warm Up to Higher Medicare Prices? Evidence from Alaska

Medicare is a roughly $700 billion public program, with physician payments representing one of its largest expenditures. Medicare's prices are also administratively set, which leaves the structure of payment changes subject to a political process that may introduce idiosyncratic features and even perverse incentives. At the same time, physician responses to changes in Medicare reimbursements are likely to vary according to the policy's duration, scope, and size. We study a setting where broad federal laws contained specific provisions that financially benefit a narrow group: Alaskan physicians. The geographically targeted payment reforms were also unique along key dimensions. Using difference-in-differences strategies, we find that large, temporary price changes increase spending but elicit no detectable supply response. Conversely, generous and permanent price shocks induce greater service flows but not uniformly across specialties. Our findings suggest that Congress may engage in fiscally inefficient Medicare spending to accomplish other legislative objectives.