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How Medicare Costs Can Be Really Cut: End Federal Price Fixing

Thursday August 11th, 2011   •   Posted by David Theroux at 7:05pm PDT   •  

In his incisive new article in the Wall Street Journal, “Three Simple Ways Medicare Can Save Money,” John Goodman notes that:

The most significant reason for our out-of-control deficit spending is health care. And the biggest federal health-care program is Medicare. That’s why almost everybody—on the right and the left— agrees that Medicare must be reformed. A good place to start is recognizing that what Medicare is trying to do is impossible.

Medicare has a list of some 7,500 separate tasks it pays physicians to perform. For each task there is a price that varies according to location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare and no doctor is going to perform every task on Medicare’s list.

Yet Medicare is potentially setting about six billion prices across the country at any one time.

Each price Medicare pays is tied to a patient with a condition. And with the 7,500 things doctors could possibly do to treat a given condition, Medicare has to be just as diligent in not paying for inappropriate care as it is in paying for procedures that should be done. So, in fact, Medicare isn’t just setting prices. It is regulating whole transactions.

Is there any chance that Medicare can set prices and approve transactions in a way that does not cause serious problems? Not likely.

What happens when Medicare gets it wrong? One result is that doctors face perverse incentives to provide care that is costlier and less appropriate than the care they should be providing. Another result is that the skill set of our nation’s doctors becomes misallocated, as medical students and practicing doctors respond to the fact that Medicare is overpaying for some skills and underpaying for others.

Consider the following example. A post at the Health Affairs blog compares a 25-minute office visit with a primary care physician (PCP) to a 10-15 minute cataract removal by an ophthalmologist. The authors note that in examining symptoms such as a persistent cough, the PCP must draw on the whole of medicine in order to diagnose the condition and treat the patient. By contrast, cataract removal is a 50-year-old procedure, and many of the doctors who do it operate in assembly-line fashion designed to maximize their income.

This year, Medicare is paying $111.36 for the PCP visit. The ophthalmologist, meanwhile, is raking in $836.36 (including the patient copayment). Medicare is paying 7.5 times more for cataract removal than for a primary care visit. If we measure according to the time spent to earn the fee, Medicare is paying the ophthalmologist 15 times what it pays the PCP.

Is there any wonder why the shortage of primary care is reaching crisis proportions in many parts of the country, while cataract removal is available at the drop of a hat?

A more sensible approach is to quit asking for the impossible. Instead, let’s begin the process of allowing medical fees to be determined the way prices are determined everywhere else in our economy—in the marketplace. . . .

For the full article, please click here.

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August 2011