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.

Obamacare’s “Out-of-Control Activism”

Writing in the New Yorker, author Ryan Lizza’s latest article examines what a re-elected Barack Obama might attempt to accomplish in a second term as President.  The piece discusses immigration, fiscal policy, and energy, but also includes an interesting passage on health care, and how the Administration might respond should the Supreme Court strike down Obamacare’s individual mandate, but leave the rest of the law in place:

Obama would face a choice: replace the mandate with a new policy or remove the remaining market reforms.  One option for replacing the mandate is to push the uninsured into the new system by requiring them to sign up for insurance when applying for other government services, such as food stamps or school loans.  But the prospects for this sort of legislation are bleak.  “We looked at this,” a former Obama aide said.  “We thought it was less constitutional than the mandate.  Among the moderate Democrats, the idea that you would pass a bill like this is unimaginable.”

Whether the Supreme Court overturns the law in part or in full, the White House will need to respond publicly.  “The strategy is to just go on the offensive and say, ‘Look at Citizens United, look at the health-care decision, look at Bush v. Gore,” the former aide said.  “We have an out-of-control activist court….That’s Plan A.  Plan B is nothing.”

This passage includes two incredible statements.  First, the Obama Administration has examined the idea of forcing individuals to prove they purchased government-approved health insurance every time they interact with public officials – a step not far removed from a “Show Me Your Papers” requirement on every American citizen.  The fact that the former Administration official quoted in the piece dismissed such a policy largely on grounds of political expediency – moderate Democrats in Congress would never vote to enact these requirements – speaks volumes to how far the Administration may go to compel individuals to obey its commands.

Yet the liberals who would require individuals to purchase government-approved health insurance – and use the full coercive power of the state to enforce such a requirement – are the same individuals who are prepared to criticize conservatives for “out of control activis[m]” if the Supreme Court strikes down some or all of Obamacare.  Imposing an unprecedented mandate to purchase a government-defined product certainly qualifies as activism.  And the Obama Administration’s idea of forcing citizens to comply with a new “Show Me Your Papers” regime to enforce government-defined health insurance is out-of-control by any reasonable definition.  That’s why it’s so critical for the Supreme Court to strike down the individual mandate, and all of Obamacare – not as a measure of judicial activism, but as a way to impose constitutional restraints on an out-of-control Congress and executive.

Did the Obama Campaign Publicly Mislead on the Costs of Obamacare?

One more interesting nugget related to Ryan Lizza’s New Yorker piece.  This afternoon the author publicly posted the 57-page memo that the presidential transition team gave to President-elect Obama in December 2008 outlining economic and fiscal options for the incoming Administration.  Table 4 (page 28) of the memo includes a list of campaign promises, and their estimated cost in 2014.  The table shows the estimated cost of Obamacare’s subsidies at $190 billion in 2014 alone.  Below the table, a note on the next page explains “the health plan is about $10 billion more costly than the campaign estimated, and the savings are about $25 billion lower than the campaign estimated.”

So according to the memo from the Administration’s own advisors, even as the Obama presidential campaign publicly claimed its proposals would cost “50-65 billion a year when fully phased in,” the Obama campaign privately estimated the cost at $180 billion in 2014 – more than three times the public number.  It is therefore quite reasonable to ask 1) whether the Obama campaign purposefully misled the public about what they knew to be the true costs of a comprehensive health bill along the lines Obama envisioned; 2) what any attempt to hide the bill’s true costs from the public suggests about its popular appeal; and 3) how hiding important facts from the public represents “change we can believe in.”

More Obamacare Gimmickry Exposed

In addition to a discussion of rationing, the New Yorker article on the Obama presidency also includes nuggets further undermining the allegation that Obamacare was a fiscally responsible measure.  In a passage relating details of the President’s February 2010 budget submission, reporter Ryan Lizza noted that the President’s advisers “told [Obama] that he needed to cut $85 billion in spending in order to submit a fiscally credible budget to Congress.”  So what did they do?

They resorted to gimmickry.…The White House could also save billions by fiddling with the way it presented savings from Obama’s health care reform bill.  Check.”

The article doesn’t reveal what specific gimmicks the White House used regarding Obamacare in the February 2010 budget; some would argue that’s because the bill was full of so many gimmicks that it would be difficult to highlight a single one.  However, we do know – because liberal groups recently admitted this fact – that by the early 2010 timeframe discussed in Lizza’s piece, the Administration knew privately that the CLASS Act Ponzi scheme was fiscally unsustainable.  But did the Administration admit this fact publicly?  Heavens no.  Instead they relied on tens of billions of dollars in fake savings from CLASS to argue that the bill was paid for – while knowing full well these “savings” would never materialize.

Lizza’s piece also notes that the Obama domestic agenda was based upon “unrealistic assumptions made during the campaign.”  And how.  A bill estimated to cost “$50-65 billion a year when fully phased in” in reality will cost more than $200 billion by the end of the decade – and a promise to cut premiums by $2500 per family has turned into a law that will instead raise insurance premiums on the individual market by $2,100 per household.

Back in 2010, then-OMB head Peter Orszag – piqued at those who would question his fiscal self-righteousness – wrote a blog post stating that Obamacare was not relying on a “business-as-usual Washington gimmick.”  Republicans knew all along that these statements were at best highly skeptical, and at worst downright disingenuous.  As more and more time transpires, the record increasingly shows that Democrats knew the exact same thing.

Obamacare’s Next Phase: Pay for Rationing?

The New Yorker’s Ryan Lizza is out with an extended feature article chronicling key moments of the Obama presidency, based in large part on a review internal White House memoranda not publicly released.  The piece features several enlightening vignettes related to health care, including one regarding a proposal never broached in public:  “In January, 2010,… [OMB Director Peter] Orszag and Ezekiel Emanuel, the chief of staff’s brother and a health-care adviser, recommended that the government pay federal employees to participate in a pilot program to study the most effective treatments for patients.”

Many would argue that, based upon the policy description included in the article, this policy would represent the worst of both worlds – giving already-overpaid federal bureaucrats additional dollars to sign away their right to access treatments that the government might deem too expensive.  But what did President Obama think of it?

Unfortunately I think the political guys are right about how it would be characterized.  Let’s go back at it in future years, when the temperature on health care and the economy has gone down.

Sadly, this desire to restrict access to treatment is consistent with the President’s prior history – along with the positions of the advisors who proposed it.  In a famous 2009 New York Times interview, the President called for a “difficult democratic conversation” about what he perceived as too much spending on end-of-life care.  Orszag was one of the prime architects of Obamacare’s IPAB, which he admitted will have “an enormous amount of potential power” and “the largest yielding of sovereignty from the Congress” in nearly a century.  And Emanuel offered the infamous chart for prioritizing scarce medical resources, in a journal article in which Emanuel admitted that his system “discriminates against older people….[However,] age, like income, is a ‘non-medical criterion’ inappropriate for allocation of medical resources.”

As indicated by the quotes above, this Administration has shown a proclivity towards reductions in health spending based upon cost-effectiveness – as well as a willingness to grant bureaucrats virtually unlimited power in the process.  The article confirms all those beliefs, while at the same time showing yet another way in which the Administration would use government bureaucrats to restrict access to treatments.  Federal workers – and the American people – should take note.