Physicians on a committee that recommends prices for health care services under Medicare are biased toward their own specialties, resulting in proposals that could generate more income for their own practices, according to research by Stanford Health Policy’s David Chan, MD, PhD.

Yet Chan also finds that involving physicians in setting prices improves the quality of information used in the process — a significant benefit for Medicare and patients alike.

“Communication is good because information benefits everyone,” says Chan, an assistant professor of medicine at the School of Medicine and investigator at the Department of Veterans Affairs. “Sometimes you need some bias to allow communication to happen. This is often why we have intermediaries, and in the case of the committee, it appears to be an example of this.”

Chan and his colleague, Michael Dickstein from New York University, published their independent analysis in a working paper released by the National Bureau of Economic Research.

Medicare, the federal health insurance program for elderly Americans, pays about $70 billion a year to the physicians who provide health care services to its participants.

The prices for those services are set by a committee of physicians convened by the American Medical Association, known as the Relative Value Scale Update Committee (RUC).

The committee is composed of 25 physician specialty society representatives; 21 of these members occupy permanent seats, while the remaining four rotate. During their three meetings each year, 200 to 300 physician services typically are up for review.

The committee meets behind closed doors. Few know how the physicians — most of whom are specialists and not primary care doctors — reach their recommendations for the health care service prices, which Medicare then typically adopts.

But health policy and Medicare analysts do know the committee carries great clout.

Their recommendations not only influence Medicare’s direct expenditures, but also indirectly shape pricing in the overall market for physician services, which are valued at $480 billion per year or 2.7 percent of the U.S. gross domestic product. The prices of medical procedures can also drive larger changes in physicians’ procedural choices and the specialty career decisions of future physicians.

Chan, who is also a faculty fellow at the Stanford Institute for Economic Policy Research, spent four years investigating the practices of the committee and whether the prices recommended by the physicians are biased toward their own specialties. He and Dickstein gained access to 4,423 fee proposals that were reviewed by the committee from 1992 to 2013.

They found that increasing a measure of affiliation between the committee and proposers by one standard deviation increases prices by 10 percent — a consequence that could support critics who claim there is conflict of interest among the committee members.

But Chan and Dickstein believe that bias is not the only thing that matters when evaluating the committee. Unbiased pricing recommendations may still lead to poor pricing suggestions if they are imprecise and have no relationship to the truth.

They examined the quality of the pricing process by looking at the underlying data used in pricing proposals, as well as whether private insurers follow Medicare pricing decisions more when the underlying proposals come from affiliated specialties. Overall, they found that pricing decisions from affiliated proposals may be of higher quality, as private insurance tends to follow these decisions more closely.

“Our findings suggest Medicare faces a balancing act in setting prices,” the authors wrote. “Inviting input from the RUC may introduce bias in prices, but it may also improve the information extracted from specialties.”

Committee That Advises Medicare on Service Prices Is Biased — but Bias Has Its Benefits