Common Practice: Spillovers from Medicare on Private Health Care

Abstract

Efforts to raise the productivity of the U.S. health care system have proceeded slowly. One potential explanation is the fragmentation of payment across insurers. Each insurer's efforts to improve care could influence how doctors practice medicine for other insurers, leading to unvalued externalities. We study these externalities by examining the unintended private insurance spillovers of a public insurer's intervention. In 2015, Medicare randomized warning letters to doctors to curtail overuse of antipsychotics. Even though the letters did not mention private insurance, they reduced prescribing to privately insured patients by 12%. The reduction to Medicare patients was 17%, and we cannot reject one-for-one spillovers. The results imply that physicians experience large costs to setting insurer-specific medical practice styles. If private insurers conducted a similar intervention with their own limited information, they would stem half as much prescribing as a social planner able and willing to better target the intervention. Our findings establish that insurers can affect health care well outside their direct purview, raising the question of how to match their private objectives with their scope of influence.