THCB

How Should Medicare Pay for Medical Care?

There are basically five possibilities. To compare them, let:

S = each unit of service, or a package of services

P = the price of each unit of service, or the price of a package of services

Then the government can:

1.     Dictate every service it will pay for and the price it will pay for each of them (fix S and P), leaving providers to compete only on amenities, including waiting times.

2.     Dictate S, but leave providers free to compete on P, say, through a system of competitive bidding.

3.     Dictate P, but leave providers free to compete on what S they will provide for that price.

4.     Initially fix S and P, but leave providers free to opt out, substituting different bundles of S & P as long as government’s cost goes down and quality of care goes up.

5.     Initially fix S and P, but allow patients to opt out, managing a portion of the funds directly and making their own purchasing decisions.

Alert readers will recognize (4) and (5) as NCPA solutions, (3) as the Rivlin-Ryan plan, and (1) as the status quo. But I’m getting ahead of the story.

Under the current system (Method 1), Medicare establishes a list of about 7,500 physician tasks it will pay, and sets the price for each of them. These prices differ, however, for every city, town, and hamlet in the land. So that in fact there are millions of prices that Medicare is administering every day.

One important drawback of this system is that it’s in no one’s interest to curtail spending. Every provider maximizes profit and every patient maximizes utility by exploiting the reimbursement formulas.

Method 2 essentially describes what we do under the Medicare Advantage plan program. Technically, the government requires private plans (mainly HMOs) to provide a basic set of benefits and offers a risk-adjusted (varied by expected health costs) premium for each enrollee. Plans offer additional benefits, however, amounting to Medicare, Medigap and Part D coverage all rolled into one. They are also free to vary the additional premium paid by the enrollee. In this way, they are competing for patients, at the margin, based on price.

Method 3 is the voucher idea proposed by Rep. Paul Ryan (R-WI) and former CBO Director Alice Rivlin. Yet it’s not as radical as some would have you believe. It was previously proposed by a Medicare reform commission established during the Clinton administration. Basically, Medicare would offer a risk-adjusted premium payment (just as it does under Medicare Advantage) but the plans would be free to repackage the benefits they offer for that premium. They would compete to offer the most attractive S, for the P government is paying.

Method 4 is the NCPA idea of allowing providers to repackage and reprice their services, the way providers do in a normal market. This method has the advantage of allowing doctors, hospitals and other supply-side entities to profit every time they discover ways to eliminate waste and inefficiency.

Attempting to get a government agency to accept new contract terms is always going to be a poor substitute for catering to consumer needs in a market place, however. That’s why Method 5 needs to be combined with Method 4 whenever possible. If seniors agree to pay for all primary care in return for a Medicare deposit to a health savings account, for example, the entire primary care sector could be revolutionized in a short amount of time.

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. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

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Bob HertzErick RodriguezKeith SaderJohn BallardDavid Goldenzweig Recent comment authors
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Bob Hertz
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For the last 45 years, Medicare officials have not had to fit their total payments into an overall budget. They total up the claims paid at the end of the year, look at the trends, try some experiments, (with minimal impact, at least so far) and basically move on. They are not mandated to do more. However — If in the future we are forced to balance the federal budget, or even come close, then the answer to the question: “What is the proper Medicare payment?” will become “Whatever fits the budget!” If our future budget for Medicare allows $1,500… Read more »

Erick Rodriguez
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I personally think method 2 is essentially the best method, it describes what we do under the Medicare Advantage plan program. Technically, the government requires private plans (mainly HMOs) to provide a basic set of benefits and offers a risk-adjusted (varied by expected health costs) premium for each enrollee. Plans offer additional benefits, however, amounting to Medicare, Medigap and Part D coverage all rolled into one. they are also free to vary the additional premium paid by the enrollee. in this way, they are competing for patients, at the margin, based on price.

Erick Rodriguez
Guest

I peronally think method 2 is essentially the best method, it describes what we do under the Medicare Advantage plan program. Technically, the government requires private plans (mainly HMOs) to provide a basic set of benefits and offers a risk-adjusted (varied by expected health costs) premium for each enrollee. Plans offer additional benefits, however, amounting to Medicare, Medigap and Part D coverage all rolled into one. they are also free to vary the additional premium paid by the enrollee. in this way, they are competing for patients, at the margin, based on price.

Keith Sader
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Keith Sader

You know this is the best post I’ve seen by Dr. Goodman to date. He elides some of the niggling details from the Ryan plan, but at least there’s a comparison. What the good doctor leaves out is how these plans differ from every other medical system in the world – the ones that cover everyone and cost less.

Until the U.S. experts get serious about using not only our own ideas, but good ideas from around the world, they’re still just whistling past the graveyard.

John Ballard
Guest

Having spent my working years in the food business I’m like Prissy in Gone With the Wind. I don’t know nothin about birthin babies. But like everyone else who ever had need of medical attention, as well as anyone who has ever been in business, I know a lot about services and prices. And I can assure you that when I or anyone I know needs medical attention service and price are way down the list of decision points. “Price” and “service” have different meanings for medical care than they do at the grocery store, auto dealership or cinema. In… Read more »

David Goldenzweig
Guest

Great post – I am a health insurance and Medicare supplement broker and everyone is running in the wrong direction. When you add a Plan F (for example) supplement to Medicare parts A and B, you pay almost nothing out of pocket for non-prescription expenses. When you pay nothing out of pocket, you have no incentive to shop price, care about extra procedures being done, etc. Health savings accounts are the most true form of “insurance” when it comes to health insurance and the same thing could be applied to Medicare, but it’s not. Even some type of “Super HSA”… Read more »