Focus banner


Medicare Payment Cuts Increase Cancer Treatments

Joseph Newhouse
Photo courtesy Joseph Newhouse

Joseph Newhouse

In healthcare, less money does not always mean less service. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which substantially reduced Medicare payments to physicians for administering outpatient chemotherapy drugs, has had the opposite effect. Rather than resulting in fewer treatments, a new study finds that the cuts have increased chemotherapy treatment rates among Medicare recipients since they took effect in 2005.

“This sort of dynamic runs contrary to what most people would expect, but economists often encounter this sort of thing,” said Joseph Newhouse, the John D. MacArthur professor of health policy and management at HSPH, an HMS professor of health care policy and a faculty member at the Harvard Kennedy School, who carried out the study with colleagues Mireille Jacobson, now at RAND; Craig Earle, now at the Ontario Institute for Cancer Research; and Mary Price of Kaiser Permanente.

The study appears in the June 17 edition of Health Affairs.

Unlike the process for prescribing typical drugs, oncologists purchase chemotherapy agents directly from pharmaceutical companies. Then they bill the patient’s insurer. Previously, many physicians charged insurers what amounted to an average profit of about 20 percent on top of their costs.

“In this case, since a high proportion of an oncologist’s income depends on prescribing, paying less per drug results in more drugs.”

In 2005, the Medicare Modernization Act established that Medicare would no longer automatically pay what physicians billed. The federal government calculated the average amount that doctors paid for each chemotherapy drug and set the reimbursement rate to no more than six percent above this average cost. Many critics claimed that this reduction would adversely affect patients since a lower monetary incentive would encourage less patient care.

In the first-ever study to test this critique, Newhouse and his team looked at Medicare claims for 222,478 beneficiaries who between 2003 and 2005 were diagnosed with lung cancer. The researchers found that on average, the percentage of patients receiving chemotherapy treatment within one month of diagnosis increased 2.4 percent, from 16.5 to 18.9, after the act took effect. Use of more costly chemotherapy drugs also increased while use of less expensive drugs declined.

“In this case,” said Jacobson, “since a high proportion of an oncologist’s income depends
on prescribing, paying less per drug results in more drugs.”

The authors say in the paper that they cannot extrapolate from these findings either the appropriateness of increased treatment or the effect on health outcomes. Additional studies will be necessary to examine these issues.

For more information, students may contact Joseph Newhouse at

Conflict Disclosure: The authors declare no conflicts of interest.

Funding Sources: The Robert Wood Johnson Foundation; the content of the work is the responsibility solely of the authors.


Copyright 2010 by the President and Fellows of Harvard College