Price-setting by Committee in Medicare

Abstract: A committee of physicians sets prices for physician services in Medicare. We study the operation of this committee, examining the theoretical tradeoff between bias and communication in delegating to a committee with a potential conflict of interest. We find that the committee grants higher prices to more affiliated physician specialties: increasing affiliation by one standard deviation increases prices by 10%. Eliminating this effect would reallocate roughly $1.9 billion in annual Medicare spending across services. Proposers less affiliated with the committee produce more hard information, measured as better survey data. Finally, we find that specialties form coalitions to increase proposal affiliations with the committee, and that more affiliated proposals result in prices that are more closely followed by private insurers.