Reforming Medicare

The idea behind a “grand bargain” to get the federal budget deficit under control is a simple one: Republicans agree to tax increases, and Democrats agree to spending cuts.

Yet a budget agreement could be a trap for Republicans, just as similar budget deals have been in the past.

There are two problems. First, the tax increases would hit immediately, while the spending cuts would be mainly in the future. That means future Congresses would have an opportunity to renege on the agreement before any serious spending reduction took place. Second, all the serious spending increases foreseen for future years are on health care, and health-care spending cannot be curtailed unless there is fundamental reform. Since the Democrats have signaled they won’t agree to fundamental reform, that means no deal that can be agreed to will be workable—unless even Democrats come to understand that health-care reform is in everybody’s interest.

Consider that Medicare has a list of about 7,500 separate tasks that it pays physicians to perform. For each task there is a price that varies by location and other factors. Of the 800,000 practicing physicians in this country, not all are signed up with Medicare, and no doctor will be a candidate to perform every task on Medicare’s list. Still, Medicare is potentially setting about 6 billion prices at any one time.

Is there any chance that Medicare can make the right decisions on all these transactions? In a word: No.

What does it mean when Medicare makes the wrong decisions? It often means that doctors face perverse incentives to provide care that is more costly, more risky, and less appropriate than the care they should be providing. It also means that the skill sets of our entire supply of doctors will become skewed, as medical students and even practicing doctors respond to the fact that Medicare is overpaying for some skills and underpaying for others.

What could we do differently? Former Medicare trustee Thomas Saving and I have a few proposals.

Pay market prices. All over the country there are retail establishments that are offering primary-care services to cash-paying patients. Walk-in clinics, doc-in-the-box clinics, and free-standing (that is, not connected with a hospital) emergency-care clinics post prices and usually deliver high-quality care. Many follow evidence-based protocols, keep records electronically, and order prescriptions electronically.

Medicare should immediately allow enrollees to obtain care at almost all of these places—paying the posted, market prices, not Medicare’s fee schedule. Since these prices are way below what Medicare would have paid at a physician’s office or hospital emergency room, this reform would lower Medicare’s costs even as it makes primary care more accessible.

Pay no more than market prices. Medicare does something no one would ever do in a normal market: It pays different providers within the same area different fees for performing the same service. For example, Medicare typically pays two or three times as much for a service performed at a hospital as it pays for that same service at a physician’s office. Why be so wasteful?

Let’s suppose that a MinuteClinic offers a flu shot for $40. Then that is all Medicare should pay—whether the shot is given by a doctor or a nurse, whether at a MinuteClinic, in a doctor’s office, at a community health center, or at a hospital.

Contract selectively. Almost every hospital in Dallas, where I live, takes Medicare patients and bills the taxpayers for the services it performs. Yet some hospitals are billing Medicare twice as much as other hospitals for such standard services as knee replacements.

Medicare should contract with low-cost, high-quality facilities. If patients for some reason prefer to go to a more expensive hospital for their surgery, they should be free to do so. But let them pay the extra cost out of their own pockets, rather than out of the taxpayer’s pocket.

Liberate paramedical personnel. One way to expand the supply of low-cost medical care is through the increased use of nurses and physician assistants to perform tasks that do not require a physician’s level of expertise. The current system discourages the creative use of paramedical personnel, however. The reason: When a task is performed by a nurse rather than a physician, Medicare automatically reduces its fee.

A better approach would be to allow doctors to profit when they find ways of reducing the cost of a procedure without reducing quality. This is the natural outcome in a free market, where firms that reduce customer costs benefit both themselves and the customers. We should always be willing to allow innovators to benefit when they reduce the cost to taxpayers. Doctors who want to practice medicine in a different way should be allowed to do so, so long as the cost to Medicare goes down and the quality of care patients receive does not suffer. The principle: Doctors should be encouraged to earn more income by saving Medicare money.

Encourage bundling. One of the obstacles to offering patients a package surgery price, covering all services, is that surgery typically involves several entities that are financially independent of one another—for example, the hospital, the surgeon, and the anesthetist. In a normal market, independent entities come together all the time, jointly produce a good or service, and agree on how to divide the revenue from the exercise. This should be happening in medicine as well. Providers should be encouraged to offer package prices for bundled services, and Medicare should be willing to pay the package price whenever it is expected to be lower than what the taxpayers would otherwise have paid.

Encourage medical tourism. You don’t actually have to go offshore to participate in the market for medical tourism. There is a flourishing market for it onshore. Canadians, for example, routinely come to the United States for surgical procedures (because of long waits in their own country), and they usually pay a package price, agreed to in advance, for all the services they receive. American seniors could be in this market as well, and they would be if Medicare allowed them to share in the savings achieved by traveling to a high-quality but lower-cost facility in another locale.

In each of these cases, and in others we could think of, the principle is the same: Let markets do what only markets can do well.