Is Medicare A Good Deal?

Think about everything you will pay to support Medicare: the payroll taxes while you are working, the premiums during retirement, and your share of the income taxes that subsidize the system. Then compare that to the benefits of Medicare insurance, say, from age 65 until the day you die.

Are you likely to come out ahead? That depends in part on how old you are. If you are a typical 85-year-old, for example, you can expect about $55,000 of insurance benefits over and above everything you have been paying into the system. If you’re a typical 25-year-old, however, you will pay an extra $111,000 into the system, over and above any benefits you can expect to receive.

By the way, this is not the sort of calculations you want to try at home on a pocket calculator. It’s too complicated. Fortunately the heavy lifting has already been done by Andrew Rettenmaier and Courtney Collins in a report for the National Center for Policy Analysis and summarized in this chart.

In terms of dollars in and dollars out, Medicare breaks down this way:

  • A typical 85-year-old is going to get back $2.69 in benefits for every dollar paid into the system in the form of premiums and taxes—a good deal by any measure.
  • People turning 65 today don’t do nearly as well — they get back $1.25 for every dollar they pay in.
  • The average worker under age 50 loses under the system — with a 45-year-old getting back only 95 cents on the dollar.
  • That’s better than the deal 25-year-olds get, however; they can expect to get back 75 cents for every dollar they contribute.

Why does Medicare favor the old and discriminate against the young? Because like Social Security, Medicare finances work like a chain letter. Although workers have been repeatedly told that their payroll taxes are being securely held in trust funds, they are actually being spent—the very minute, the very hour, the very day they arrive in the Treasury’s bank account.

No money has been saved. No investments have been made. No cash has been stashed away in bank vaults. Today’s payroll tax payments are being spent to pay medical bills for today’s retirees. And if any surplus materializes, it’s spent on other government programs. As a result, when today’s workers reach the eligibility age of 65, they will be able to get benefits only if future taxpayers pay (higher) taxes to support them.

Just as Bernie Madoff was able to offer early investors above-market returns, early retirees got a bonanza from Social Security and Medicare. That’s the way chain-letter finance works. But in the long run, there’s no free lunch. That’s why things look so dismal for young people entering the labor market today.

The return from Medicare has been very much in the news lately because of an Urban Institute finding that seniors are getting a lot more out of Medicare than they put in. This conclusion is being used to justify cuts in Medicare spending favored by both Democrats and Republicans.

There is no question that Medicare needs reforming. But the Urban Institute paints a picture that is too rosy. That report failed to account for income taxes seniors pay to support Medicare, failed to adjust for the full measure of Medicare cuts under health reform (ObamaCare) and treated Medicare promises as though they are as secure as government bonds, even though they clearly are not.

Regardless of who cranks the numbers, the reality remains the same. The generations who will be hit the hardest by Medicare reform are the same people who weren’t going to get a good deal from the system even without reform.

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51 replies »

  1. I wasn’t arguing that we should maintain significant excess hospital capacity in urban areas for the likelihood of an extremely remote attack that would cause thousands of casualties.

  2. ” it’s not actuarial/risk based”

    Then why do they have a full time acturary? An entire department actually.

    “and/or for-profit.”

    80% of private health insurance is not for profit does that make it social insurance? It would appeat a self funded plan is really an entitlement and social insurance

    “Your estate doesn’t get any money back if you never reach eligibility age.”

    When an eligible family member who has paid Social Security taxes and earned enough “credits” dies, certain family members—including widow(er)s (and divorced widow(er)s), children, and dependent parents—are eligible to collect survivor benefits. The more money an individual earns, the higher the value of his or her survivors’ insurance.

  3. Spare me, Nate.

    “regurgatate”? LOL.

    It IS in fact “social insurance” because being an “entitlement,” it’s not actuarial/risk based and/or for-profit. It is NOT an “investment.” Your estate doesn’t get any money back if you never reach eligibility age.

  4. It would be counterproductive to maintain significant excess hospital capacity to handle an extremely rare (hopefully) mass casualty event for two reasons. First, it would be prohibitively expensive since hospitals are both capital intensive to build and labor intensive to staff. Second, excess beds create an inclination to fill them with patients that don’t really need to be here. For example, admitting a patient for observation who could be safely sent home or performing surgeries on patients who could do just as well with less expensive care like PT for back pain or medication for stable angina. Primary care doctors might be quicker to have their nursing home patients come into the hospital on a regular basis because it’s easier for the doctor to care for them there than in the nursing home..

    As Nate noted, with all of our recent war experience and prior military knowledge, we should be very good at getting field hospitals up and running quickly.

  5. guess that leads to a need for a cost benefit analysis of maintaining excess beds, and the potential for overuse, versus the quality of our field hospitals. With all of our recent wars I would think we would excel at those.

  6. The short answer is a resounding ‘no’ because the attention has been to focus on a WMD attack such as by a biological agent that would be slower-developing. There is essentially little/no surge capacity in most ED to treat a large number of casualties simultaneously.

    “In spring 2008, the House Committee on Oversight and Government Reform conducted a point-in-time survey of level I trauma centers in 7 US cities considered at high risk of terrorist attack.9 On the date of the survey, responding hospitals were so overcrowded with patients, it is unlikely that they could handle an incident of the scale of the Madrid train bombings, which produced 2000 casualties in a matter of minutes.”

  7. fewer beds also comes with considerable risk. I forget which European country had greatly reduced the number of beds then had some health crisis like H1N1 or heat wave and didn’t have any place to put them.

    Number of beds is not the issue, the cost of maintaining an empty room isn’t that great, its filling beds for the sake of filling beds.

    NY would be an interesting study with all the hospitals they have lost, what if we had another 9/11 or worse, what is their excess capicity on any given day to handle mass trama

  8. John/Barry – I would disagree that there is a lot more roon to strip out additional inpatient beds/capacity. Already a bunch has been stripped out since the introduction of DRGs via Medicare. It is pretty much been stable the past few years according to AHA statistics. Where you might see some diminished numbers as critical care access hospitals and certain urban hospitals close in the next few years due to economics/trends in healthcare but that it won’t have a big impact on the overall number of inpatient hospital beds.

  9. John –

    Large hospitals and hospital systems are expanding their roster of employed physicians. A lot of those doctors will continue to work where they do now – outside of hospitals. Many hospitals also own outpatient clinics, imaging centers and physician practices already. As more care moves outside of the hospital, investment in hospital physical plant should shrink. The other facilities will grow. Most doctors who practice in hospitals now are not hospital employees but independent contractors with practice privileges. In the future, many more of them will be salaried employees. Also, to the extent that hospitals assume a leadership role in the formation and operation of ACO’s, they will want to control as much of the medical continuum as possible in order to better manage costs and earn shared savings if they do a good job of controlling costs while providing high quality care and satisfying patients.

  10. Margalit this assumes insurers are forced to continue to have contracts with hospitals. Tomorrow we could return to scheduled benefit plans and say we pay inpatient hospital days at $x, that is the benefit of the plan, if the hospital wants to charge more they need to justify it to the patient. Problem solved.

  11. kathleen go back and read the last two years of comments to disprove all the trash you just wrote. Where have you been to pop up in 2011 making 2008 arguments?

  12. “Both trust funds have enough to continue fully for several years at the end of which they will still be able to meet upwards of eight percent or more of obligations, ”

    For a short period of time, thnat 80% claim is very misleading John. They are taking in money today from 18 year olds and making implicit promises of future benefit. They are assuming new liabilities that wont mature for 47 years atleast. To ignore these and claim 80% will be paid is very misleading. As currently structured the contributions of an 18 year old will yield them nothing.

  13. within the margin of error Barry.

    The audits we have done lately show inpatient Medicare pays around cost maybe a little bit more. Outpatient way under. If we pay 120% of cost we are twice to three times what Medicare would have allowed.

  14. ” Who is most likely to benefit from these programs? Wealthier people who put in more in absolute dollars (because the tax is a %age of income) but are much more likely to live longer.”

    Terrible analysis Maggie, age means nothing. An unhealthy person with diabetes who spends 4 years in and out of the hospital and dies at 70 cost far more then a rich healthy person who dies at home at 90.

    Nursing home cost alone disproves your argument. How many rich people are in nursing homes on the public dime?

  15. if you frame it as social insurance instead of investment is that not also a strawman? BobbyG you don’t know what a strawman is, look up the term before you regurgatate the sound bites.

    Both of you are looking at it wrong, common when people that don’t understand insurance insist on talking insurance. If one person said I need to spend more so I get my monies worth then that is an illogical way of viewing insurance. When an entire pool of risk is that far upside down or underwater it is the sign of structural flaws. Didn’t you liberals just pass a law saying insurance companies had to have loss ratios of 80 or 85%? Why doesn’t medicare need to follow the same rules? At what level of debt is it an issue? 25% going to service debt appears to be ok with you, how about 50%? How about 75% of premium going to pay debt you ok with that to?

  16. I have a question.
    If the number of hospital beds is declining (as well as number of hospitals, I suppose) where are all those salaried doctors going to work that were talked about in that other post? I thought they were joining hospital staffs but that must not be the case.

    It’s reassuring and sensible, by the way, to read that the number of patients opting for palliative care is growing. That’s a biggie when it comes to bending the overall cost curve of health care.

  17. Peter –

    There is no question that some hospitals are paid more than others for similar work and some safety net hospitals serve more low income people as a percentage of their total patient mix than hospitals located in wealthier areas. However, there has also long been excess inpatient capacity in the market. When occupancy rates are consistently below the industry average, revenue is insufficient to cover the inherently high fixed costs of operating a hospital even if the payer mix is pretty good. Also, as I’ve noted before, there is a long term secular trend toward more care being delivered on an outpatient basis and more inpatient surgical procedures requiring shorter hospital stays than in the past because of new less invasive surgical techniques. The number of hospital beds nationwide declined materially over the last 30 years or so even as the population grew and aged. Demand for inpatient beds will likely decline further in the future, especially as more people opt for hospice or palliative care at the end of life.

  18. Barry, what type of clientele did those hospitals serve? Appears on research that they shouldered too many non-paying patients and ER to inpatient ratios were too high as well.

    “Officials blamed a high rate of poor and uninsured patients as well as cuts in Medicare and Medicaid and the hospital’s inability to negotiate favorable contracts with health insurance companies, claiming their fees were 30 percent below the market rate.”

  19. Peter –

    Plenty of hospitals have closed in recent years, at least in NY and NJ, and more will close in the future. The most recent high profile example in NYC was the closing of St. Vincent’s after about 140 years in business.

    As for more cost-effective referrals, greater use of capitation, shared savings and shared risk will drive this. BCBSMA’s alternative quality contracts are an example. While the contracts have been criticized for offering global payment rates that are too high, a leader from one of the large physician groups, Atrius, commented that it will give them a chance to “retool the factory” which will include referring patients to less expensive hospitals that can provide care comparable in quality to the more expensive facilities. If you get to keep some of the cost savings and are at some risk for cost overruns, you will learn to care pretty quickly about costs and prices – both your own and the providers to whom you refer patients.

  20. “Hopefully, the less efficient and more hospitals will gradually shrink their operations or close altogether over time leaving both hospital bed supply and demand smaller and in better balance than now.”

    Are you holding your breath over this one? These hospitals will just be purchased by another facility or merge – they won’t go away.

    “This, of course, is another reason why we need good price and quality transparency tools to help referring doctors and patients to choose the most cost-effective providers.”

    Why would a referring doctor care about the price of another doctor, they don’t even know their own prices and leave that to their office manager.

  21. “common sense tells me that the only hospitals that will go under will be those who have no market power to extract high reimbursements from payers.”

    Margalit –

    The marketplace is starting to change as tiered networks and narrow networks gain traction with employers. I think more and more of the powerful hospitals are going to wind up out-of-network over the next few years and employers and insurers will do a better job of informing employees that care provided by these hospitals is, for the most part, no better than what’s available at more cost-effective competitors. For the relatively few procedures where the powerful hospitals really are better, the insurer can always reimburse members at a more generous rate for those and pay something like 110% of Medicare for everything else. Good luck to the hospitals in trying to collect significantly more than that from patients under 65 years old when they accept Medicare rates as full payment from Medicare beneficiaries.

    Just last week, Highmark, the dominant insurer in Western PA, announced an agreement that will lead to the purchase of West Penn Allegheny Health System in Pittsburgh in preparation for the expiration of its contract next year with the University of Pittsburgh Medical Center (UPMC), the dominant provider in that city. As these new strategies take hold, I think the currently powerful hospitals will have to lower their rates significantly to remain competitive. If the strategies don’t work, we could move to Maryland style all payer systems in many states. Either way, if the high market share hospitals continue to try to gouge insurers and patients, they will wind up cutting their own throats. At least that’s my opinion.

  22. “Hopefully, the less efficient and more hospitals will gradually shrink their operations or close altogether”

    Barry, common sense tells me that the only hospitals that will go under will be those who have no market power to extract high reimbursements from payers. These small hospitals may be some of the most efficient ones, which will also drive their revenues down, helping nail the coffin shut.
    So the largest, most powerful and most expensive will survive. Same for outpatient.

  23. Peter –

    I think tort reform would curb a lot of excess utilization that’s driven by doctors’ fear of litigation. Given the power of the trail lawyer lobby, though, I’m not holding my breath until that happens. At the same time, there is a trend toward more doctors leaving private practice and going to work for hospitals on a salaried basis plus, sometimes, bonus opportunity. Since there is still excess hospital inpatient capacity in many markets, they are going to try to use every tool at their disposal to drive revenue. Among those tools is to use revenue generation as one of the metrics that determines physician compensation. This, of course, is another reason why we need good price and quality transparency tools to help referring doctors and patients to choose the most cost-effective providers. Hopefully, the less efficient and more hospitals will gradually shrink their operations or close altogether over time leaving both hospital bed supply and demand smaller and in better balance than now.

  24. “I’m not sure how to effectively rein in this practice by hospitals hungry for revenue to pay their bills and service their debt while large multi-specialty physician groups are sometimes guilty of a similar practice.”

    I thought tort reform was going to curb unnecessary utilization? :>)

  25. Margalit,
    That was just meant to be an example. But I would venture to say that most FP docs are neither trained nor willing nor appropriately reimbursed to take care of complex (i.e. really sick) patients, and where I work, most FP do the colds, the sprains, the well child visits and routine checks, the birth control, etc., and the rest is distributed to the specialists (I am not at all saying that’s all easy if done right – it is already a challenge to do the referrals right if you don’t send everyone everywhere as some FPs do).
    IMHO the really sick are best cared for by IM docs that have some special background in geriatrics and diabetes.

  26. rbaer –

    Conceptually, I really like your description of how to pay all physicians from PCP’s to surgeons by time spent treating patients coupled with a payment rate multiplier to reflect surgeon’s extra training, skill and the complexity of care. I also agree that surgeons doing lots of unnecessary back operations and interventional cardiologists inserting unneeded stents need to be curbed. Those who do too much unneeded care should be identified by payers through utilization review, if necessary, so both referring doctors and patients can avoid them.

    As it happens, a relative of one of my colleagues is a salaried neurosurgeon for a famous hospital in a large city. According to her, he makes in the $500K range with an opportunity for a bonus as well. As often happens, though, the hospital, like many others, pressures salaried doctors to drive revenue for the mother ship and bill as much as possible sometimes even pushing them to do procedures that they consider unnecessary. I’m not sure how to effectively rein in this practice by hospitals hungry for revenue to pay their bills and service their debt while large multi-specialty physician groups are sometimes guilty of a similar practice. As far as I know, the only large healthcare organizations that do NOT use some measure of productivity or revenue generation to evaluate their salaried doctors for compensation and bonus purposes are the Mayo Clinic and Kaiser.

    As an aside, I think reasonable compensation for a PCP with 10 or more years experience is in the $200-$250K range in most of the country. The comparable number for surgeons might be $500-$600K. In high cost cities like NYC, LA, SF, and Boston, a 20%-25% premium above those numbers could probably be justified.

    In exchange for an approach like this, I would expect doctors to practice in a cost-effective manner and I would want the medical specialty societies to weed out the relatively small number of doctors who account for a disproportionate share of malpractice.

  27. My understanding of the RVBS system is that it was politically hijacked within CMS by specialists at the expense of primary care providers. Once you create a system in which doctors turn against one another with a guild mentality, you basically favor the more well heeled. Countries which have universal health care have few litigation or malpractice claims because future health care costs incurred will be covered. Think of the dollars we could save not ordering tests solely to avoid being sued.

  28. “Despite its best efforts, CMS overpays for some procedures and underpays for many others.”

    Rubber stamping the recommendations of the corrupt RUC is the best CMS can do? If true, we might as well all pack up and go home.

  29. A national health insurance plan for everyone, eg. Medicare for all, would bring real meaning to these conversations about returns on our “investment” into the fund, sensible reimbursement for primary care vs. specialized care, controlling overall expenditures based on societal values, while saving all of us about 25-30% of our health care dollar, eg. that percentage which is pouring into insurance companies, managed care companies and the administrative/collection arms of hospitals and providers. There is excellent information available on sensible care delivery in other nations which spend a much smaller % of their GDP on acheiving better outcomes, with 2-5% administrative costs. (TR Reid “The Healing of America.”) Only here in the US do we believe insurance market forces will bring about greater health and sustainability, while 30% of the dollars we spend do not provide any actual health care service. The insurance market is driven by the need to sustain it’s own profits. So is the pharmaceutical and health devices market, but its consumers are different. When pharmaceutical or manufacturers of health care products innovate, develop and market their products they look to governments/purchasers in every developed nation except the United States. Then, they look at the private market in the US, to see wherein their profits will derive. Why? The market for their products everywhere else in the world depends on cost effectiveness of the technology. Here in the United States it is based on marketability. What can be advertised and what demand can be stimulated in consumers of the health care “product.” In the US our collective ambivalence, hesitation and fear about doing what is morally right and sensible in health care delivery, along with those aggressive lobbying dollars, maintains a multi-billion dollar industry which is in the process of bankrupting us. I have been a specialist, a primary care provider, self employed, hospital employed, and engaged in provider institutions at many levels. When I drill down on the incentives which drive the survival of physicians, providers and hospitals, the picture is partly “One Flew Over the Cuckoo’s Nest,” the other part “Catch 22.” Insurance company profits are based on denial of payments which they can justify, based on the rules they are allowed to jimmy, to ultimately keep shareholders happy. The proposal that providers join with insurers to develop ACO’s simply keeps the insurers in the drivers seat while spreading about their risk. It is happening in 2011 just as it happened in the 1970’s when I entered medical school. Most providers would much prefer to deal with one insurer, like Medicare, than with hundreds of companies. Medicare is at the least transparent, accountable, consistent and efficient. The buzzwords “managed care,” “accountable care organizations,” have changed but the game has not. The biggest loosers have been our most vulnerable citizens, those without a political voice, children, the mentally ill, pregnant women, minorities, the unemployed. “There but for the grace of…… ” Most of us are just a paycheck away or a catastrophic illness away from financial ruin. We waste an unacceptable amount of energy, dollars and human capital on “market strategies” for each sector to compete and survive in this system. Let’s redirect our investment more sensibly.

  30. “Let’s say the PCP deals with low complexity work (ankle sprain) and the surgeon with a complex, multimorbid patient.”

    rbaer, shouldn’t this be the other way around?

  31. @Rob N
    Actually I have no problem comparing these two “entitlement” programs with annuities as long as the reality of how they work is also recognized. The dynamic is the same for both, a reasonably predictable “return or payout” that can vary according to how long you live (or don’t) and maintain good health (or don’t).

    The main difference is that in the case of annuities there might be some amount left to the estate of the deceased but in the case of these programs the “estate” happens to be everybody in the peer group, not just the heirs in the last will and testament.
    Changing the subject, another of my pet peeves is the foolishness about either of these two programs “going broke.”
    Nothing could be further from the truth.
    One would think that with all the media coverages of mortgages, loans, short sales, discounts, interest rates, maturities, and bankruptcies both real and strategic more people would know the difference between default (meaning paying less or missing a payment) and “going broke.” (bankruptcy – real, not strategic).

    But one would be wrong.

    Both trust funds have enough to continue fully for several years at the end of which they will still be able to meet upwards of eight percent or more of obligations, even if nothing is done in the interim to avert that from happening. Worst case scenario that may be called defaulting but certainly not going broke, any more than people we all know are not “going broke” simply because they may be behind on their obligations.

    Considering how carelessly Congress routinely gets behind on obligations (unfunded wars and ancillary costs lasting over a decade, not to mention Medicare Part D which was never properly funded, but that’s another tawdry story….) I would think a bit of lag for either of these two programs would be of very little consequence.

    Thanks for reading.
    I’ll try to keep quiet now. I’m just an old guy blogging while the professionals are having a good discussion and making headway…

  32. “I wonder how you would propose to set the reimbursement rate for orthopedic surgery, brain surgery, or cardiothoracic surgery vs. a standard primary care”

    To say it simple, it’s all a question of ratios. Let’s say the PCP has the least training (med school + FP residency, 3 years) and the surgeon the very highest level (say 5 years residency plus fellowship). Let’s say the PCP deals with low complexity work (ankle sprain) and the surgeon with a complex, multimorbid patient. The surgeon would maybe paid 1.5 to 2.5 per time unit than the PCP during the surgery (as a reminder, the ankle sprain visit is probably over after 15 minutes). The surgeon would also be billing a lengthy presurgery visit/consult for case- and imaging review, maybe at 1.5 to 1.8 times the level of the PCP. A simple elective gallbladder should be, say, 1.3 to 1.8 of the PCP. At the end, the surgeon is not motivated by reimbursement for doing complex procedures, but by what’s right for the patient. By the way, the PCP has one occurence for possible litigation (e.g. the ankle sprain turned out to be a fracture and there is a bad outcome), and the surgeon one (big fat ) one as well, but that should be figured seperately. There should be adjustments for off hour work – the emergency weekend appendectomy being at, say, 2.5 per time unit. Given the extra training and selection, it’s OK for surgeons to make a little more than PCPs, north of say 300K and for some subspecialty surgeons 500 K (all depending on case mix and workload), but there is no reason for society to produce wealthy physician entrepreneurs who do useless back surgery after back surgery or stent after stent. As a side note, I would be in favor of training FP and gen IM residents better (many but not all are already excellent) and to increase their discretion, status and pay, but that’s a different matter.

    Let me remind you that money should not be (and usually is not) the most important motivator to become a physician, and money alone should not be the motivator for surgery, neither for choosing this profession nor for actually doing it. We cannot bring 700 K physicians down to (inflation adjusted) 350 K in 3 years, but we have to start addressing the huge compensation inequalities leading to irrational care- and supply patterns.

  33. This has been a fascinating blog post to read (especially the comments). Going back to John’s initial comments (before the topic of reimbursement and solving the system started) about Medicare and SS not being investment plans. I agree, they are not. However, the more and more I read, they are more like annuities. I realize they are not annuities and we don’t lump sum pay into them, but the way we receive benefit from both are very similar to the pay out on annuities. The longer you live, the more you get. In a way, that seems appropriate. The chart was great to look at as well, providing that it holds true (I realize this is a big if), then at least I don’t have a negative return (sorry John, I know you do not like that term for this . . . but it is how most people feel about it).

  34. rbaer –

    Medicare’s RBRVS reimbursement system was, as I understand it, intended to reflect such factors as time, skill, and risk. You may or may not know that RBRVS actually consists of three components – a technical piece that reflects the doctor’s time, skill, risk, etc, a portion intended to cover practice expenses, and a much smaller piece to capture the cost of malpractice insurance. The latter may be woefully inadequate for high risk specialties but I don’t know for sure. Uwe Reinhardt of Princeton has written quite a bit on this subject in the past including a post on his Economix blog last December, I believe. I wonder how you would propose to set the reimbursement rate for orthopedic surgery, brain surgery, or cardiothoracic surgery vs. a standard primary care visit that is fair to both the surgeons and the PCP and adequately captures the hugely different cost of malpractice insurance even if a hospital is actually paying the insurance premium.

  35. Margalit –

    Personally, I don’t have a problem with insurers owning clinics. While Nate Ogden can speak to this better than I can, I believe that for most insurers of non-Medicare and non-Medicaid patients, 40% of their claims costs are for hospital based care – inpatient + outpatient. Another 40% is for physician fees, labs, non-hospital owned imaging, PT, etc. The remaining 20% is for prescription drugs. With proper incentives and appropriate data at their disposal, I think there is plenty that doctors can do to refer patients to more cost-effective hospitals and other providers and to prescribe generic drugs instead of brands when generics are available. There is lots of room to cut costs without impacting necessary utilization of services.

    rbaer –

    I heard hospital executives say that Medicare is an OK payer for inpatient care but a poor payer for outpatient services. As you know, the secular trend is toward more and more care being provided on an outpatient basis.

    As for compensating physicians based on time, I would love that for primary care doctors and many specialists. If, for example, I see my cardiologist and the encounter takes a half-hour or 45 minutes, it shouldn’t matter if I need a consult, a stress test, an echo or an X-ray. It would be great if he could just post a sign that says our charge is X per hour with a minimum charge of Y. Obviously, the cost of labs and other required outside services and drugs would be extra. For expensive imaging, these should be billed based on machine time. If an image takes 30 minutes or less, it should cost X. If it takes 31-45 minutes, charge 1.5X and if it takes 46-60 minutes, charge 2X. It shouldn’t matter whether contrast is needed or not or which body part is involved. I would compensate surgeons based on standardized OR time for the procedure. If an operation is supposed to take one hour, charge X. If he can do it in less time, he still gets paid X. If there are complications, he doesn’t get paid extra because a certain number of complications should be factored into setting the base rate. All of these nutty codes just add complexity.

    As for the Medicare fee schedule, I think it’s like squeezing a balloon. Despite its best efforts, CMS overpays for some procedures and underpays for many others. Some new procedures might start out with a sensible payment and then get easier to do over time as doctors come down the learning curve or simpler and more streamlined techniques are developed. The payment then becomes too high for the reduced time and effort but CMS doesn’t adjust until after a lengthy time lag. There are always going to be anomalies in any system of dictated prices. It’s efforts to reflect geographical differences in medical input costs may also not be completely accurate resulting in much more generous payments in some places than others for the same work.

  36. Barry,

    let me ask you whether my impression (that arose from witnessing quite a few strategic and reimbursement discussions) is true:
    medicare is a reasonable payor for INpatient care (i.e. it is reimbursing at least at cost or better)

    To me, it seems that Margalit’s questions could be answered in a more simple way:
    we currently invest (as a nation) tremendous resources into health care services of marginal or even negative value, and this is not only due to the fee for service structure, but also due to the fact that certain procedures and surgeries are simply greatly overvalued (i.e. the involved physician makes a multiple per hour compared to other – nonprocedural – services, and therefore has a great incentive to perform those). E.g. It’s well documented that complex back surgeries rose in reply to reimbursement patterns, with worse outcomes. With these reimbursement patterns, we created legions of specialists making north of 350K per year, performing a lot of work that has little benefit other than generating income.

    Why do so few people advocate to adjust, as a major starter, the medicare fee schedule to reimburse providers evenly based on time, expertise and risk? As a disclaimer, I am in a mostly nonsurgical specialty that has a few procedures (for which we can self refer, and I see how quite a few of my colleagues try to maximize those, understandably and regrettably).

  37. I don’t know, Barry. Primary care is not a major consumer of resources. Perhaps it is well suited to prepayment as indicative by the various concierge models popping up now, but I don’t see any savings materializing there.

    As far as insurers, and since you mentioned United, read this article on KHN

    Seems that our wishes to remove practicing doctors from the decision making role in health care will eventually come true. Somehow, this doesn’t make me feel all warm and fuzzy.

  38. Margalit –

    Care coordination and utilization are separate issues from the price charged per procedure and different strategies are needed to tackle each. I think bundled pricing for surgical procedures and greater use of capitation, at least for primary care, can help to reduce wasteful, unnecessary and duplicative treatment. Electronic records can also be helpful there, particularly for patients with multiple co-morbidities seeing several doctors.

    To tackle the price per procedure issue, we need a mechanism to create countervailing power against powerful hospitals and physician groups with large local or regional market share. Tiered networks and limited or narrow networks hold promise here and the tiered networks especially are finally starting to gain traction with employers. It’s also interesting to note that over the last few years since the controversy over how insurers used the Ingenix database to determine usual and customary charges to reimburse out-of-network providers, insurers are now mostly indexing those payments off Medicare. Many are paying a flat percentage, often 110%, of Medicare and the provider can balance bill the patient for the rest. United, for one, now uses this indexing off Medicare approach in all but a handful of states and will probably use it everywhere before long.

    As I’ve noted before, it will be interesting to watch hospitals try to explain to commercially insured patients why they should have to pay the difference between 110% of Medicare and 200% or 300% or whatever the hospital charges when it accepts 100% of Medicare as full payment from Medicare patients. If they resort to heavy handed collection tactics, the media will have a field day exposing them. Hospitals cannot collect high prices for procedures from insurers with whom they don’t have contracts. Good luck trying to collect those charges from most patients. Hopefully, regulators can deal with the issue of out-of-network hospitals balance billing for charges for care delivered under emergency conditions.

  39. “I think all of health care needs to move away from the fee for service payment model in favor of bundled pricing for surgical procedures and greater use of capitation, at least for primary care.”

    Barry, I really don’t understand why everybody keeps saying this. There is good evidence that this is not going to reduce costs
    so why keep plowing ahead into what is obviously a wrong direction? Is the frying pan better than the fire in some ways?

    It’s not how we pay, it’s what we pay. If you want to reduce costs, you just have to stand up and say that you will pay less – less for each piece of work, or less per bundle (calculated based on price for each piece anyway), and be prepared to leave the table if necessary and let the chips fall were they may. Are we prepared to do that?

  40. Outstanding, Barry Carol. (And thanks for getting the thread back on a serious note. My imagination was getting out of hand.)

    One little quibble.
    “Social Security will provide a lower return on investment for those aging into it today than prior generations received.”
    When I see that I get a twinge because I was in effect over-taxed my entire working life (hence a surplus in the form of the SS Trust Fund) to furnish a safety net big enough to accommodate the upcoming baby boom generation. The twinge part comes not from having had the funds set aside, but that they were spent as part of the general fund, as regular revenue. (At least thanks to inflation, those dollars were worth more when they were used than they would have been five, ten or twenty years hence.)

  41. I don’t think Medicare reform is needed if, by reform, you mean raising the age of eligibility or the payroll tax rate and income tax rates that fund it or means test it. Instead, I think all of health care needs to move away from the fee for service payment model in favor of bundled pricing for surgical procedures and greater use of capitation, at least for primary care. We also need a more sensible approach to end of life care which will require some adjustment of patient expectations if we are to reduce the futile spending when the end is near. More broadly, we need to stop paying for services, tests, procedures and drugs that either don’t work or cost more than they’re worth. I also still think we need substantive tort reform though I know liberals don’t think defensive medicine is a big contributor to healthcare costs.

    For the record, it’s not just the 65 and older population that qualifies for Medicare. People who need kidney dialysis qualify at any age while those on Social Security Disability are eligible for Medicare two years after disability payments begin.

    Today’s middle age and elderly populations are paying far more, both in absolute dollars and as a percentage of income, to educate young people. Property taxes, which finance most of elementary and secondary education, have soared over the last 40-50 years and so has college tuition.

    Finally, from a return on investment standpoint, everyone in society is paying more for healthcare as a percentage of income than they did 30 or 40 years ago, but there is a lot more that modern medicine can do for us. I don’t think I, or anyone else I know, would like to go back to 1950’s healthcare at 1950’s prices.

    By contrast, Social Security will provide a lower return on investment for those aging into it today than prior generations received. Benefits are tied to covered earnings but the benefit structure provides a higher wage replacement ratio to lower income workers than to higher income workers while both tax rates and the covered wages to which the tax applies rose sharply, especially since the 1983 Greenspan Commission reforms. With Social Security, there is a theoretical alternative, in the form of 401-K plans funded by the payroll tax that both the employer and employee would have paid. Most people who live long enough to retire might be better off under a privatized system though I still wouldn’t recommend it because there is some money that absolutely positively has to be there when it’s needed. Medicare, by contrast, is an insurance plan that provides the same benefits package to everyone regardless of how much they paid in taxes over their working lifetimes.

  42. Been thinking…

    Question — “Why does Medicare favor the old and discriminate against the young?”

    Answer — Same reason life insurance discriminates against those who die old, favoring those who die young. Or is it the other way around? Hmm…

    I saw an emergency roadside kit equipped with flashing lights, radio, first-aid kit, flares, hand tools and battery cables. It made me want to get one so I could look forward to having an emergency. But what if I buy one and fail to have any emergencies? Wasted money?

    Only three ways to beat the Medicare racket — die before you go to work., get sick quickly and expensively as soon as you become eligible or live on inherited wealth.
    (I could be wrong, but I don’t think trust fund payouts and/or capital gains disbursements are subject to earned income taxes.)

  43. “Why does Medicare favor the old and discriminate against the young?”

    John, what’s your point? Why does private insurance favor the healthy and discriminate against the sick? Do you think it’ll be a good deal if the young and old break even on dollars paid and dollars used? Talk to the average car or house owner and ask them if they come out ahead on insurance premiums paid and claims history – is that a good deal? Maybe you should work out at what age the “young” should start contributing to Medicare so that they break even before they die; of course that would assume the same level of system sickness usage, which we all know is calculable.

  44. John–

    Yes, Medicare and SS are not individual investment plans like 401-k’s.

    The money that you put in is your contribution to a an insurance pool.

    If you die at 67, you don’t “get out” what you put in.

    If you have the good (or bad luck, depending on your point of view) to live to
    99, what you get out is far more than you put in.

    These programs exist because we, as a society, decided to pool the risk of living longer and running out of money.

    P.S. Who is most likely to benefit from these programs? Wealthier people who put in more in absolute dollars (because the tax is a %age of income) but are much more likely to live longer.

  45. I’ve said this so may times I feel like a broken record.


    ►Medicare is a program using CURRENT payroll taxes to PARTIALLY fund CURRENT expenses for beneficiaries.

    ►Social Security is a program using CURRENT payroll taxes to fund CURRENT benefits to beneficiaries.

    Neither of these two programs is intended to “pay in” for the purpose of “getting back” anything. They are social contracts through which those who work are taxed to fund needs for those not working. NOW. Currently. In the present. Not in the future.
    How many ways can it be explained???

    The reason for the “trust fund” is simple. Actuarial projections made years ago anticipated the needs of baby boomers and the working population (guess who?) was taxed accordingly in order to salt away that surplus for their future needs.
    The National Commission on Social Security Reform, also known as the Greenspan Commission, hatched the clever idea that Congress could piss away… er borrow from the SS Trust fund by using the funds which were replaced by special purpose “bonds” which President Bush referred to as “IOU’s.”

    But all that is water over the dam.

    The point is that speaking of both of these programs in terms of “paying in” and “getting back” is a pernicious deception, in part because of inflation, but mostly because both systems are constructed as “pay as you go” concepts.

    Calling Medicare “insurance” is totally misleading.
    It isn’t.
    It never was.
    And I wish people would stop using the terms interchangeably.
    Besides, anyone who is a Medicare beneficiary knows well they he will either pay his share of medical expenses out of pocket or buy a supplemental insurance policy. Who ever heard of buying insurance for “insurance”? Why don’t companies sell secondary policies to cover deductibles? Because the deductible is part of the formula establishing the main premium. The deductible portion is a way for the policy holder and the company to share risk.

  46. I would like to see someone else corroborate this. The predictive ability of the National Center for Policy Analysis is less than perfect.

    ” In an Aug. 3, 1993, media fact sheet, John Goodman of the National Center for Policy Analysis predicted the following results from the higher taxes: Capital formation would be reduced by $1.76 trillion through 1998, 1.34 million fewer jobs would be created and the real GDP growth rate would be 0.4% lower than it otherwise would have been.”


  47. “By the way, this is not the sort of calculations you want to try at home on a pocket calculator. It’s too complicated.”
    Moreover, you may get a result that would not please the sponsors of the NACP, a conservative “think tank”.

    Actually, I do like this analysis. If a today 25 yo is still covered by traditional medicare, it means that we must have bent the health care cost curve. Some time in the future.

  48. Yeah. Of COURSE, Mr. Goodman would frame it in “investment” terms rather than from the “social insurance” perspective. Straw Man 101.

  49. I’m trying as hard as I can to stay healthy so I will use Medicare as little as possible in my twilight years.

    I guess it would financially prudent to work on developing a couple of serious diseases so I get back more of what I’ve paid into Medicare?

    And I guess I should hope to be in a major MVA over the holiday weekend so I get back more of what I’ve paid for auto coverage?

    Very strange way to look at insurance.

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