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Lemon Dropping: The IO of Discrimination in Primary Care

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I describe a novel panel dataset on the U.S. primary care physician population, as well as the institutions and measurement strategies used to study physician behavior in the marketplace. I document several facts on primary care markets and supplier location decisions, the types of patients physicians accept, the scale of their practices, their productivity and practice patterns, and their financial incentives. There is heterogeneity in financial incentives across consumers due to insurance coverage, and there is geographic variation in practice costs and in payment regulations from Medicare and Medicaid. Primary care physicians are selective in the types of patients they accept: Medicare patients have greater access to primary care than low income Medicaid Dual Eligible patients. Physicians are also less likely to accept Medicare and Medicaid patients than those with private insurance, deriving most of their revenue from the private sector. The demographics and health of accepted patients vary across physicians. Geographic and within-location variation in physician practice patterns evidence underlying dispersion in supplier productivity. Motivated by these data, I adapt the economic theory of discrimination to explain rejection of willing customers, allowing for heterogeneity in prices and cost across consumers and for dispersion in firm productivity. I analyze the empirical relationships between scale, productivity, and patient acceptance in the primary care population, and find that physicians who produce less are more likely to discriminate. However, conditional on some acceptance of both patient types, the relative proportion of low income patients is decreasing with scale. The data and discrimination theory together imply Dual Eligible patients have lower marginal cost compared to Medicare patients, but have higher fixed or sunk costs, and that this cost wedge is closing as physician productivity grows. Finally, observing geographic variation in output price regulations and input costs, I exploit physician migration to identify the effects of financial incentives on patient acceptance, scale, and practice patterns. I find that physicians are more likely to accept more profitable patients. However, omnibus environmental factors subsuming prices explain less than half of the change in physician behavior upon migration. I use a structural supply model to estimate the idiosyncratic financial incentives affecting production choices and acceptance of Medicare and Medicaid Dual Eligible patients. As expected, I find that Dual Eligibles have lower marginal cost of primary care compared to Medicare patients. Estimated marginal cost is dispersed across suppliers within a given market. The regression results and structural cost estimates together imply that equalizing prices for Dual Eligible and Medicare patients would erase the primary care access gap for low income elders. Allowing price competition would lower prices compared to the regulated status quo, but reduce access for Medicare patients due to lemon dropping.

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  • 04/09/2019
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