We investigate the hypothesis that increasing access for the indigent to physicians’ offices shifts care from hospital outpatient settings and lowers Medicaid costs (the so-called ‘‘offset effect’’). To evaluate this hypothesis we exploit a large increase in physician fees in the Tennessee Medicaid program, using Georgia as a control. We find that beneficiaries shifted care from clinics to offices, but that there was little or no shifting from hospital outpatient departments or emergency rooms. Thus, we find no offset effect in outpatient expenditures. Inpatient admissions and expenditures fell, reducing overall program spending 8 percent. Because the inpatient reduction did not occur in ambulatory-care-sensitive diagnoses. however, we cannot demonstrate a causal relationship with the fee change.

Jonathan Gruber is a professor of economics at the Massachusetts Institute of Technology and a researcher at the National Bureau of Economic Research. Kathleen Adams is a professor of economics at Emory University and Joseph P. Newhouse is a professor of economics at Harvard University. The authors are grateful to the Robert Wood Johnson Foundation for financial support, to Raajnish Chitaley, Davina Ling. and Laurie Meneades for research assistance, and to Arnold Epstein, and two anonymous referees for helpful comments. The data used in this article can be obtained beginning May 1998 through April 2001 from Jonathan Gruber, Department of Economics, MIT E52-355; 77 Massachusetts Avenue; Cambridge, MA 02139—4307.