The problem starts with the Center for Medicare and Medicaid Services (CMS), the federal agency that sets prices for the medical services of Medicare patients. CMS is really a giant central-planning agency. It sets hundreds of thousands of prices. What are the odds that it sets all the right prices? Zero. In fact, with central planning, an organization like CMS cannot ever know what the right price is.
An obvious solution to this problem is to have a free market in healthcare–with no Medicare. But since that is unlikely to happen soon, incremental changes can be made to move closer to a free market. Despite the socialized system of CMS, it’s possible to approximate free-market prices with “balance billing.” In its purest form, doctors would be able to charge whatever they want for their services, and patients would pay the difference between that price and the amount Medicare pays. Today, doctors who accept Medicare reimbursement are not allowed to charge anything more.
With balance billing, many fees would certainly increase–at least for those seniors who are willing and able to pay them. But it would also stem, and even reverse, the exit of doctors from Medicare. And that’s not all. As any health economist can tell you, one of the biggest problems with our healthcare system, one that existed even before ObamaCare, is that the majority of what people spend on healthcare is “other people’s money.” One reason we know so little about prices is that few of us actually pay the price of medical care. Instead, we pay nothing, a small co-payment, or a small percent of the price. The main thing I learned in my two years as the senior economist for health care policy with President Reagan’s Council of Economic Advisers is that health care costs so darn much because we pay so darn little for it. Why hesitate to say yes to a $500 test your doctor wants to order if you know that you will pay only $50 for it?
This is from my article, “Medicare and the Free Market,” published last night on Hoover’s ezine, Defining Ideas.
READER COMMENTS
Ken from Ohio
Nov 26 2014 at 12:33pm
The Medicare problem is even worse than Prof Henderson states.
The Medicare physician fee schedule has 3 category
Participing Fee (PAR) – this is the fee that medicare pays the doctor if the doctor is enrolled as an official medicare provider.
Nonparticipating fee – this is the fee that medicare pays the doctor if the doctor is not an official medicare provider but still bills medicare. The nonPAR fee is 5% less than the PAR fee – to serve as an incentive for the doctor to enroll as a medicare provider
Limiting charge – this is 115% of the PAR fee. This is the maximum fee that a doctor can charge even if the doctor is not participating with medicare. so essentially the law caps the fee a doctor can charge a patient to 115% of the medicare participating fee schedule.
in my opinion, the solution is to do exactly as Prof. Henderson describes.
But in addition, there needs to be a major expansion of H1B visa’s available to foreign doctors – an increase in the supply of doctors (who may be willing to work for the medicare PAR fee)would increase competition – – and help reduce prices.
Here’s my scenario
1) Increase the H1B visas specific for doctors to 100,000 per year.
2) Allow doctors to balance bill (eliminate the current “limiting charge system)
3)Patients would gravitate to the doctor they could afford and prefer.
4) Medicare would continue to reduce the PAR fee, therefor reducing overall medicare spending and save taxpayers money.
5) The increased number of doctors through H1B expansion would stabilize the physician population willing to work for the PAR fee – and prevent physician access problems.
Problem solved
Tom West
Nov 26 2014 at 2:29pm
Ontario had this sort of system (base + extra billing) for many years, and the result was that for certain specialties pretty much 100% of doctors billed roughly the same amount above the medicare level.
Nothing else changed. (Okay, I’m certain *something* else changed around the margin, but the margin was invisibly small as far as regular customers were concerned.)
The result, those who were poor tended to avoid those specialties, at the cost of their health and breaking the promise of universality of access.
health care costs so darn much because we pay so darn little for it.
Very true. The catch is how does one build a system that has the very non-Libertarian premise that every person should have access to medical care, regardless of ability to pay (a position subscribed to by pretty much every Western nation, except for about 1/2 the US), yet attempts to take advantage of the market system to keep costs down, allocate resources, etc?
Canada has more flexibility in this area as it doesn’t have to compete with private competition, but it sadly hasn’t taken even baby steps in this direction.
Rich Berger
Nov 26 2014 at 2:34pm
I would recommend John Goodman’s book Priceless for more on this madness.
TSB
Nov 26 2014 at 8:25pm
I think the Australian Medicare system works like this, but is nevertheless terrible at discovering market prices because doctors are prohibited from advertising prices. I’m not sure if that prohibition is legislated or is an agreement with the doctors’ professional association/cartel.
mof
Nov 27 2014 at 6:18am
CMS is doing just what large monopsonies do in the private sector. Do you also favor restricting Walmart from setting prices for its 150K skus?
Rich Berger
Nov 27 2014 at 9:48am
mof-
I don’t think you understand the definition of monopsonist. While Walmart may pressure its suppliers on price, it is definitely not the sole buyer. Walmart is a big player in an even bigger market, but does not set prices like the CMS does.
Tracy W
Nov 28 2014 at 7:03am
What does the taxpayer get out of this?
Under the current system, the taxpayer gets some confidence that they don’t have to fork out large sums for their parents’ health and whatever comfort they get from the thought of such benefits to other elderly people who happen to be strangers. (They may also optimistically hope to have the same security themselves when they retire.)
Under the new system, if the supply of doctors is inelastic, presumably doctors will just raise prices to the point that the market will bear, so the taxpayers will be on hook to pay for grandma’s healthcare on top of their taxes. Basically, it would be a transfer from taxpayers to doctors. Unless taxpayers really like seeing wealthy doctors, I don’t get the benefit.
David R. Henderson
Nov 28 2014 at 2:54pm
@Tracy W,
What does the taxpayer get out of this?
The taxpayer saves money, because otherwise we get Congress’s annual “doc fix,” which costs money.
The rest of your comment is not about taxpayers qua taxpayers but is about beneficiaries of Medicare. I can answer that too, but the answer is too involved to put in a comment. But I’ll give the brief one that is in the article I wrote: More doctors will be willing to serve Medicare beneficiaries. As someone who is married to a Medicare beneficiary, I can tell you that this is a HUGE concern for her and for many other Medicare beneficiaries whom I talk to.
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