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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6 replies »

  1. 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 a day for hospital care,
    $100 for an office visit, $250 for a diagnostic test, and $50 a month for a drug, then that will become the payment. The “costs” of the provider will be the provider’s problem.

    In a health system with a real budget, no worries too much about whether private clinics and hospitals find their Medicare payments “adequate.” The private businesses either adapt to the federal prices, or they do not participate in the federal program.

    This has happened to Medicaid in quite a few states. There are few primary doctors who will participate at the low, budget-driven fees.

    The obvious answer should have been a public health system, where the government hires its own doctors and pays them civil service salaries (and cancels their ridiculuously high student debts.)

    Nations which have national health system do not have a servile respect for medical entrepreneurs, whether surgeons or drug companies or for-profit hospitals. English or Canadian or German or French bureaucrats do not flnch from setting MRI costs at $198 or hospital per-diems at $1,500, if that is what it takes to meet the budget.

    We move from cost-based pricing, if you will, into price-based costing.

    Bruce Vladeck has pointed out that Medicare has become a welfare system for providers. too. Which is not so awful except that some of the providers are very, very wealthy.

    John Goodman has written eloquently in the past about the problem of cost-plus pricing in Medicare. The heritage of cost-plus is still with us.

    Bob Hertz
    The Health Care Crusade

  2. 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.

  3. 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.

  4. 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.

  5. 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 most cases these two terms have precise meanings but with medical care both are often the beginning of an unpredictable sequence of requirements leading down an unknown path. When the service is finished and the price well understood, all is fine. But if the service indicates a need for more service, and the shopping options are time-limited by the seriousness of the medical condition, the question of price gets to be an open-ended question with no clear answer.

    It would be wonderful if my medical care could be as easily organized as my wardrobe, auto care or leisure plans. But that is not the case. I don’t get to choose what, when or how seriously I will need medical attention. And in the end the easily manipulated S and P factors vanish in the presence of a Big A. AFFORDABILITY is what will ultimately determine how the American disease-management industrial complex will embrace (or refuse) my “business” because after all the rest is swept away, the financial security of the system trumps the collective medical efficacy of the products.

    If you need a marketplace comparison, look at American manufacturing which has succeeded in my lifetime in ratcheting up wages and prices to the point that companies that once were the bedrock of our economy either priced themselves into oblivion or remained competitive by employing lower-paid foreign workers. (Medical tourism, anyone?)

    Meantime, I’m ready for all this discussion of prices and services to take second place to the effective and achievable delivery of universal health care rather than the current system of sliding quality which delivers the best to those with the most and the least (or nothing at all) to those at the lower end of the economic ladder. if the current discussions don’t change direction, Medicare will soon be no problem because that population will become eligible for Medicaid and states will be forced to pinch them off a little at a time because they haven’t the resources to serve them.

  6. 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” could be created, offering additional tax credits or deductions for contributing over a certain threshold at various income levels or ages. That would make too much sense though…

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