The effect of cost sharing on health services utilization is analyzed from a new perspective, that is, its effects on physician response to cost sharing. A primary data set was constructed using medical records and billing files from a large multispecialty group practice during the three-year period surrounding the introduction of cost sharing to the United Mine Workers Health and Retirement Fund. This same group practice also served an equally large number of patients covered by United Steelworkers' health benefit plans, for which similar utilization data were available. The questions addressed in this interinsurer study are: (1) to what extent does a physician's treatment of medically similar cases vary, following a drop in patient visits as a result of cost sharing? and (2) what is the impact, if any, on costs of care for other patients in the practice (e.g., "spillover effects" such as cost shifting)? Answers to these kinds of questions are necessary to predict the effects of cost sharing on overall health care costs. A fixed-effects model of physician service use was applied to data on episodes of treatment for all patients in a private group practice. This shows that the introduction of cost sharing to some patients in a practice does, in fact, increase the treatment costs to other patients in the same practice who remain under stable insurance plans. The analysis demonstrates that when the economic effects of cost sharing on physician service use are analyzed for all patients within a physician practice, the findings are remarkably different from those of an analysis limited to those patients directly affected by cost sharing.
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DISCUSSION
The results provide substantial empirical evidence consistent with the predictions of the physician-induced demand hypothesis. First, a positive effect on total fees per episode is found following the introduction of cost-cutting measures to the UMWA. This result is contrary to the predictions of traditional competitive market models. While the price of an episode of treatment for UMWA beneficiaries did decrease following the introduction of cost sharing, the price of episodes of treatment (in constant dollars) increased for other patients in the practice, holding constant the variables of age, sex, diagnosis, severity, complexity, new patient status, prior use, and physician characteristics.
The source of the price increase comes totally from physician initiated characteristics of treatment, that is, from increased ambulatory fees, increased inpatient fees, and increased length of stay in the hospital. When patient-initiated characteristics- the number of visits made during an episode of treatment -are analyzed, the effect of cost sharing becomes statistically insignificant; while visits per episode decreased for UMWA beneficiaries following cost sharing, visits per episode for other patients in the practice were unaffected by UMWA cost sharing.
