The Flaw in Using Medicare Price Caps as a Cost Control Model

Recent articles have suggested capping health-care prices at a percentage above Medicare payment levels as a way to bring down health costs. But evidence suggests that, rather than reducing overall spending levels, Medicare’s price caps don’t effectively control health costs.

The August blog post proposing the idea, published on the Health Affairs site, suggested that “every patient and every insurance company” should have the option of paying 125% of what Medicare charges for a given service, as a way to rationalize reimbursement systems notorious for their lack of transparency. Ironically, the authors of the Health Affairs post are affiliated with the Dartmouth Atlas of Health Care, a project that attempts to explain geographic variations in health spending (why Medicare spends much more per patient in Miami than in Minneapolis, for example). Much of its analysis has concluded that differences in physician behavior may account for much of the unexplained variations.

And therein lies the problem: Medicare’s payment system may be to blame for the higher levels in spending. Providers, when paid less per procedure, have sought to increase their incomes by performing more procedures over the past decade. According to the Medicare Payment Advisory Commission, while price levels rose 9% between 2000 and 2012, overall physician spending per Medicare patient skyrocketed by 72.4% in the same period–because doctors provided more services to beneficiaries.

These problems of low prices driving volume increases seem most acute in Medicare itself. In 2009, the town of McAllen, Tex., became famous after a New Yorker article by Atul Gawande profiled its high-spending health system. McAllen was shown to have abnormally high rates of Medicare per-patient spending than comparable areas. Yet research published in 2010 found that when it came to private health insurance, McAllen actually spent less per patient than the similarly situated town of El Paso. The researchers concluded that “health care providers respond quite differently to incentives in Medicare compared to those in private health insurance programs.”

One co-author of the 2010 study concluding that Medicare creates different provider incentives than does private insurance was Jonathan Skinner, who also co-wrote the August Health Affairs blog post calling for Medicare’s price caps to be extended to all medical providers. Unfortunately, the former questions the wisdom of the latter. Price caps could well function as a politically appealing “solution” whose knock-on effects mean it won’t ultimately solve much of anything.

This post was originally published at the Wall Street Journal Think Tank blog.

Just the Facts on IPAB

The Center for American Progress has a blog posting about an event it held with Atul Gawande, in which he made comments about the Independent Payment Advisory Board (IPAB) – a body created in the health care law to enforce a cap on Medicare spending (a cap that President Obama’s deficit reduction plan wants to lower even further).  Both Dr. Gawande’s comments and the posting itself include misconceptions about the board and its roles and duties:

  • Gawande claims that the IPAB will merely issue “rules of the road” to control costs.  That’s not accurate – the IPAB is specifically charged with enforcing caps on Medicare spending.
  • Gawande discusses one of the “rules” for the IPAB to examine: “Is it okay if in a community the doctors and the hospital become consolidated?  And some competition starts to disappear.  What happens when that happens?”  But the IPAB has no jurisdiction over competition law, or antitrust concerns – its raison d’être is enforcing a cap on Medicare spending.
  • The blog post itself claims that “unlike insurers…the IPAB will establish the ‘rules of the road’ in a transparent and accountable manner.”  The IPAB may be transparent, but it is definitely NOT accountable – unlike insurers, whom customers can sue for denying covered treatments, the decisions of IPAB’s unelected bureaucrats are not subject to judicial review.

A column in the Fiscal Times last week more accurately describes what the IPAB really is – a board of bureaucrats that will limit coverage options:

Consumers themselves are in no position to make informed decisions about health care, especially with the stress, worry, and need for instant decisions that an illness can present….The solution…is for people with the necessary knowledge about medical services and a commitment to the public interest to do what HMOs did in the 1990s, decide which procedures should and should not be covered by Medicare….Consumers are unlikely to trust any limitations on something as important as their health care from insurance companies or government appointed boards; they certainly didn’t like this part of HMOs.  But our long run budget problem is driven mainly by the expectation of rising health care costs, and we have no choice but to find some way of bringing these costs under control.  The only question at this point is how these decisions will be determined, and among the feasible choices a board of experts is the best choice that we have.

Some would argue that empowering patients rather than bureaucrats is a much better solution to controlling health care costs.  But regardless, the Fiscal Times at least identified the important issues in the ongoing entitlement debate – namely, whether Americans will support having a “board of experts” determining whether or not they receive needed care.