Policy implications of physician income homeostasis.

Physicians tend to protect their desired target incomes in the face of declining fees by working more. This homeostatic "volume response" in the name of income protection can have budgetary consequences opposite of those intended: overall spending will probably rise. This is seen because when the physician tries to earn one extra dollar, he or she causes many additional dollars to be spent within the health care economy. The fraction of total costs represented by the physician's fee varies among specialties and procedures. Among certain medical services that are susceptible to doctor-induced demand, the Medicare standard physician payment may represent 10 percent or less of the total cost of that service. Accordingly, even if physicians were very inefficient at finding additional work to compensate for lower fees, cutting physician payments may still lead to increased spending. For example, a 50 percent decrease in the physician payment for a single operation, total hip replacement, may trigger nearly one billion dollars in additional annual Medicare spending, even if surgeons can find only half of the additional work they would need to neutralize the effect of the fee reduction. A sophisticated health care spending policy would recognize that cutting fees induces volume increases. It would recognize that such fee decreases without controls on the volume response will lead to increases in overall costs. Finally, it would recognize that the fiscal effect of the volume response varies between specialties and procedures, and thus flexible guidelines are in order.