Goodman’s Law

The other day I ran across five items of interest:

1.     A news article about Medicare paying $800 to rent a wheelchair that could have been purchased outright for $350;

2.     An article in The Atlantic arguing that the United States spends more on renal dialysis and gets worse results than other countries because of the nonsensical way we pay for dialysis;

3.     A Uwe Reinhardt explanation of how Medicare pays hospitals (via an approving pointer from Austin Frakt) along with Uwe’s defense of the system; but nonetheless linking to

4.     A Reinhardt Health Affairs interview with former CMS director Tom Scully who opines that “Medicare is a dumb payer;” and

5.     A Reinhardt explanation of how Medicare pays doctors (7,000 physician tasks, each with a price that varies for every city, town and hamlet in the land), along with a challenge to readers to come up with a better way.

Okay. I accept the challenge.

I sometimes wonder if health economists actually understand how other markets work.  Let’s try a thought experiment.  Suppose you ran a business that purchased lots of wheelchairs and you had the misfortune of paying the way Medicare pays.  What do you think would happen?

The minute your presence in the market was generally known — probably before the first wheelchair was even delivered — you would be visited by a rival vendor offering to meet your needs for, say, two-thirds of what you were paying.  Then another rival would offer to top that — say, cutting your costs in half… and before long the cost of the wheelchair to you would be a fraction of what it started out to be. This is how normal, sensible people function in typical markets, day in and day out.

[Parenthetically, I meet people every day who could save Medicare tens of thousands of dollars, but they can’t get the bureaucrats at CMS to return their phone calls because (like the TSA agents who search for bombs while ignoring passengers) the system is not guided by anyone with a modicum of commonsense.]

I’ll skip over the dialysis case because we have previously pointed out that that particular payment system is dumb, dumb and dumber and the principles are pretty much the same.

That will let us jump to the really interesting question: Is it possible for Medicare to purchase wheelchairs (and other health care) the way a rational person (spending his own money to meet his own needs) or a for-profit enterprise (spending its own money to meet its own needs) would do?

[Sorry for all of those qualifications, but in health care people rarely are spending their own money to meet their own needs — which is the source of most of our problems.]

The answer is: We could get huge improvement if Medicare followed the scenario I outlined above, including these commonsense steps:

1.     Wheelchair vendors must be able to approach Medicare with offers to be paid in a different way, provided that the cost to the government is reduced and quality of care is maintained or improved.

2.     Medicare does not set preconditions on what it will or won’t do, but leaves the private sector completely free to innovate and find ways to lower cost and raise quality.

3.     Medicare enters contracts as quickly as the private sector does — without long delays and inordinate paperwork.

4.     Medicare devotes some of the savings it expects to realize to monitoring contracts and assuring promised performance and ending contracts or renegotiating if the terms are not abided by.

5.     Medicare accepts upfront that not every contract will work out as expected and some decisions will retrospectively be seen to be wrong, because that is part of normal business experience.

Alert readers will notice that I have proposed this strategy before — in The Wall Street Journal, in the study A Framework for Medicare Reform and in many other places. I even showed how such as approach could radically transform diabetic care, for example. Alas. It all fell on deaf ears. Alert readers will also notice that this approach is the exact opposite of the approach taken by the Obama administration, and before that by Bush, Clinton, and Bush.  Instead of letting wheelchair vendors propose new ways of producing, renting and selling wheelchairs, the inside-the-Beltway mentality wants Washington to make all these decisions.

Any “reform” following the inside-the-Beltway approach will only substitute a new dumb payment system for an old one. Okay, maybe the new one will be a little bit smarter, but the bottom line will be the same. All the vendors will analyze the new payment formulas and set out to maximize against them.

Can you imagine the CEO of a private company reading in the newspaper that he is renting something for $800 for 13 months that could have been purchased outright for $350 and doing nothing about it because his company is committed to a payment formula that allows only renting and not buying? Of course not!

Here is Goodman’s Law for Efficient Purchasing:

There is no such thing as a smart formula.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis.  He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system. Dr. Goodman’s Health Policy Blog is considered among the top conservative health care blogs on the internet where pro-free enterprise, private sector solutions to health care problems are discussed by top health policy experts from all sides of the political spectrum.

13 replies »

  1. I’m from the OweBama administration, and I’m here to help.
    And get me, a good paycheck.
    Sick, revolting and insane. That is stopping, next year.

  2. “Senator Tom Coburn went to the final result of all of these which we all promptly forgot, as he did. U.S. healthcare is 18% of our GDP and we spend [mispend] $1 out of every $3 on waste, fraud and abuse.”
    Then I would expect Senator Coburn to publish examples of this as it should be easy to find. I would ealso expect him to have written legislation to stop this. I cant remember anything he has written that would reduce this spending by 1/3.

  3. Art:
    It’s very easy to find the waste. In our office, we call it the Insurance, Pre-Auth and Referral department (now larger than our nursing dept.). Our office visits are 50% Medicare, but 80% of the department deals only with non-government insurers.

  4. All I ever read about are examples of microeconomics, as people tend to “point out” examples of the lack of common sense.
    Senator Tom Coburn went to the final result of all of these which we all promptly forgot, as he did. U.S. healthcare is 18% of our GDP and we spend [mispend] $1 out of every $3 on waste, fraud and abuse. That calculates out to 6% of our GDP is mispent on waste, fraud and abuse, which based on a entitlement cost of $2.8 trillion would buy a lot of wheelchairs!
    An we can’t find much of these items, as HHS, CMS and Justice recovering $1 billion a year is bragged about as being fantastic! Add that to the cost of each wheelchair and it would be cheaper to buy each a BMW 700 with a driver!!!

  5. “…why aren’t private insurance fees lower than Medicare fees?”
    Medicare has no “fees” unless you are referring to Part B amounts deducted from Social Security checks for so-called medical services. (Part A, hospital services, is presumably “covered” by payroll taxes collected from the currently working population.) If the private sector handled revenue and disbursements as mindlessly and carelessly as our elected representatives those people would be serving hard time in prison.
    That said, the private sector, thanks to the workmanlike efforts of lobbyists combined with breathtaking amounts of contributions to political campaigns, has endless carve-outs, payouts, exemptions and subsidies that enable profit lines to remain healthy. (How many hospitals, individual physicians or other providers can be found among the record number of bankruptcies now exploding across the economy?)
    “Medicare rates” refers to how much providers are reimbursed by Medicare (and Medicaid — important but not the same) according to byzantine formulas that vary geographically. I’m sure there is reasoning behind the smoke, but I doubt any one individual can explain it all coherently. As I write I realize this comes across as overly cynical, but the mess we are in did not happen all at once and will not be resolved quickly. The roadmap of PPACA is still under construction but it’s the only game in town. I wish it were better but changing hearts and minds is as hard to do in America as it has shown to be in Asia.
    Before I quit, a word about Medicare Advantage. My wife and I are going into our third year with Medicare. I have been following this discussion closely for the last several years. Our first year with Medicare I had MA and she had a supplement. Thanks to her good health, the second year we both took MA. (Why? NO PREMIUM! Looked like a no-brainer.) But this time she had a medical problem requiring hospitalization and we are facing a large bill which would not have been due with a supplement. In this case the financial picture was a wash since the amount we are paying approximates what a supplement would have cost. But one more big medical event would push us into the loss column.
    But the larger point is this: MA is a private-sector insurance alternative which poaches beneficiaries from Medicare, and has higher costs in tax dollars than Medicare. Beginning with PPACA Medicare Advantage plans will start to wean off as those overpayments by the government will be incrementally stopped. That, together with newly-enacted Medical/Loss Ratios (still being hotly argued) will help bring costs under control. (HELP, mind you — not INSURE.)
    As beneficiaries we all want something for nothing. But as taxpayers we want to pay as little as possible. These two aims are obviously at cross purposes. As we say in the food business: “Speed, Quality, Price — Pick Two”.

  6. If John is correct, then why aren’t private insurance fees lower than Medicare fees? It is not regulations. Private insurances rarely cover additional services that Medicare does not. If they do, as in Medicare Advantage, they are services that do not provide comparable value.
    Mind you, I would love it if markets could work, as it is a much cleaner solution. However, I see no practical way to accomplish it. If you want me to negotiate with each individual patient on price, you have just doubled my non-productive time. If you want to have a true market economy, where both parties can walk away from the deal, then I am not doing anymore emergency C-sectons on 40 lb patients at 0400 unless I get paid way, way more. Other than the MINO (Medicine in name only) like plastics or Lasik, I dont see that many areas where this will work.

  7. I refer you to a quote I found via this blog (on “db’s Medical Rant”): “You will never understand bureaucracies until you understand that for bureaucrats procedure is everything and outcomes are nothing.” Attributed to Thomas Sowell.

  8. I would add that Medicare should not control prices, rather it should decide to pay part of the services it covers, and allow the free market to function for the balance. Critics of this approach raise the terror of outrageous charges. However, the balance would be reasonable for most things, because supplemental insurance would pay the balance, thus spreading the risk like non-governmental insurance does now.

  9. Are you totally oblivious that Medicare rates and policies have been captive to Congress from the jump? It’s one of the juiciest pork-barrel tits in Washington.
    That is why PPACA gives real teeth (finally) to MedPAC, rebranded as IPAB, whose “recommendations” have been ignored by Congress for years. If I worked at CMS I would have a bad attitude, too.

  10. Government price-setting assumes there is this small basket of commodity goods, called health care, and therefore there should be one price only for each item.
    Today, in the U.S. marketplace, there are some 10 million different products. Let government try to set prices for them all, and it will simply try to reduce their number to something manageable — like the estimated 300 goods stone age societies enjoyed.

  11. Providers cannot approach Medicare and negotiate more efficient ways of being paid. Yet, they are free to game the system and up-code, provide more services than needed and force seniors to return time and time again for services that could have been bundled under normal market conditions. If you analyze the cost and benefits of the two aforementioned strategies, ones boosts physician income while the other action is futile. Thus, providers who want to maximize income concentrate their efforts to boosting utilization rather than efficiency.

  12. The free market creates low prices and high quality, because providers are competing for customers based on price and quality. Health care could benefit from a dose of free market to solve the price and quality problems and are pervasive throughout the health care system.

  13. The system suck$ because of provider lobbying. That’s not a market based system. If we wanted a market based system politicians would have allowed Medicare to get bids on drugs like the VA. So this is not a failure of Medicare, it is a success for providers and political lobbying.